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AMERICAN   ECONOMIC   LIFE 


THE  MACMILLAN  COMPANY 

NEW  YORK    •    BOSTON   •    CHICAGO    •    DALLAS 
ATLANTA  •    SAN   FRANCISCO 

MACMILLAN  &   CO.,  Limited 

LONDON  •    BOMBAY  •    CALCUTTA 
MELBOURNE 

THE  MACMILLAN  CO.  OF  CANADA,  Ltd. 

TORONTO 


AMERICAN 
ECONOMIC     LIFE 

In  Its 
CIVIC   AND    SOCIAL    ASPECTS 


By 

HENRY  REED  BURCH,  Ph.D. 

CO-AUTHOR    OF    AMERICAN    SOCIAL    PROBLEMS 

HEAD    OF    DEPARTMENT   OF    HISTORY    AND    COMMERCE 

WEST   PHILADELPHIA    HIGH    SCHOOL   FOR    BOYS 

PHILADELPHIA 


Nefo  gork 
THE    MACMILLAN   COMPANY 

1921 

All  rights  reserved 


•  • :  •: .  .  •"•-: 

'•    I  I  •  I  •••  •    •  ••  •      •  •••  »-l 


Copyright,  1921, 
By  THE  MACMILLAN  COMPANY. 

Set  up  and  electrotyped.     Published  March,  1921. 


Norfooorj  $«B8 

J.  S.  Cushing  Co.  —  Berwick  &  Smith  Co. 

Norwood,  Mass.,  U.S.A. 


Go 

THE    SPIRIT    OF 

ABIDING   AMERICANISM 

THIS    BOOK    IS 
DEDICATED 


492128 


Digitized  by  the  Internet  Archive 

in  2007  with  funding  from 

Microsoft  Corporation 


http://www.archive.org/details/americaneconomicOOburcrich 


PREFACE 

This  book,  a  restatement  of  Elements  of  Economics, 
is  an  attempt  to  present  in  problem  form  the  more  im- 
portant phases  of  American  economic  life.  Based  as  it 
is  upon  twenty  years  of  teaching  experience  in  the  gen- 
eral field  of  the  social  sciences,  the  writer  hopes  that  it 
may  prove  not  only  teachable,  but  that  its  material  may 
be  found  to  be  especially  adapted  to  the  needs  of  the 
elementary  student  of  social  science. 

With  this  end  in  view,  every  effort  has  been  made  to 
secure  simplicity  of  thought  and  clarity  of  expression. 
The  material  is  carefully  organized  by  means  of  the  chapter 
outlines,  while  the  topics  arranged  at  the  close  of  each 
chapter  are  intended  to  reenforce  and  illuminate  the 
matter  previously  presented.  This  matter,  since  it  is 
entirely  elementary  in  character,  is  largely  descriptive 
and  illustrative.  Although  economic  theory  is  duly 
recognized  whenever  it  touches  vitally  the  problem  at 
hand,  the  main  emphasis  is  always  placed  on  the  con- 
crete problem,  for  the  comprehension  of  which  a  knowl- 
edge of  the  theory  is  essential.  Not  theory,  but  economic 
life  itself,  is  the  objective  in  view. 

Of  even  greater  importance  in  determining  the  value  of 
this  work  in  secondary  education  is  its  emphasis  upon 
everything  truly  American  in  the  formation  of  national 
character.  While  the  book  is  built  around  the  industrial 
and  economic  factors  in  American  civilization,  its  civic 


viii  Preface 

and  social  aspects  are  everywhere  recognized.  In  fact, 
every  economic  problem  is  approached  from  the  civic  and 
social  standpoint.  So  interwoven  are  these  phases  of 
national  development  that  no  adequate  treatment  can  be 
given  any  one  of  them  without  recognizing  their  close 
relationship  and  interdependence.  Accordingly,  this  book 
is  intended  to  appeal  primarily  to  all  those  who  believe  that 
true  training  in  American  citizenship  can  be  secured  only 
by  a  properly  correlated  knowledge  of  the  economic,  civic, 
and  social  factors  in  American  civilization. 

H.  R.  B. 

Philadelphia,  Pa., 
March  i,  1921. 


TABLE   OF   CONTENTS 

PART  I 
INTRODUCTION 


CHAPTER 


PAGE 


I.    The  Basis  of  Economics i 

II.    The  Goal  of  Economics 9 

III.  Economic  Ideals 17 

IV.  Prosperity 28 

PART   II 

PROBLEMS  OF   CONSUMPTION 

V.    The  Consumption  of  Wealth 38 

VI.    The  Problem  of  the  Standard  of  Living     .        .  47 

VII.    The  Problem  of  Income 57 

PART   III 
PROBLEMS  OF  PRODUCTION 

Section  I.    The  Factors  of  Production 

VIII.    The  Production  of  Wealth 71 

IX.    Natural  Resources  of  the  United  States  .         .81 

X.    Land  Reclamation 93 

XI.    Forest  Conservation ■  101 

XII.    Water  Possibilities 109 

XIII.  The  Nature  of  Labor 120 

XIV.  The  Labor  Force  of  the  United  States      ....  129 

ix 


Table  of  Contents 


CHAPTER 

XV.  Economic  Aspects  of  Immigration 

XVI.  The  Risks  of  Labor  . 

XVII.  Problems  of  Industry 

XVIII.  Social  and  Industrial  Education 

XIX.  The  Nature  of  Capital    . 

XX.  The  Increase  of  Capital  . 

XXI.  Capital  and  Surplus  Wealth  . 

Section  II.    Production  in  the  United  States 

XXII.  American  Agriculture 

XXIII.  The  Problem  of  Soil  Fertility 

XXIV.  New  Forms  of  Plant  and  Animal  Life 
XXV.  Early  American  Industry 

XXVI.  Large  Scale  Production  . 

XXVII.  Business  Organization 

XXVIII.  The  Industrial  Army 

XXIX.  Transportation  Agencies 

XXX.  Regulation  of  Railroads 

XXXI.  Efficiency  in  Production 


PART  IV 
PROBLEMS   OF  EXCHANGE 

XXXII.  Value  and  Price 

XXXIII.  Price  and  Monopoly 

XXXIV.  Money  Problems 
XXXV.  Credit  and  Banking  . 

XXXVI.    Modern  Finance 
XXXVII.    International  Trade 
XXXVIII.    Taxation     . 


Table  of  Contents 


XI 


PART  V 
PROBLEMS  OF  DISTRIBUTION 

CHAPTER 

XXXIX.  A  Survey  of  Distribution 

XL.  The  Theory  of  Rent 

XLI.  The  Theory  of  Wages 

XLII.  The  Theory  of  Interest 

XLIII.  The  Theory  of  Profits 

XLIV.  The  Outlook  for  Labor 


PAGE 
396 
408 
419 

431 

442 

453 


PART  VI 

PROBLEMS   OF   ECONOMIC   REFORM 

XLV.  Experimental  Programs    . 

XL VI.  The  Program  of  Labor     . 

XL VII.  The  Program  of  Regulation    . 

XL VIII.  Programs  of  Nationalization  . 

XLIX.  Economic  Reform  and  Social  Progress 

Index        


463 

476 
488 
500 
516 

527 


AMERICAN   ECONOMIC  LIFE- ■; 

PART  ONE 
INTRODUCTION 

CHAPTER  I 
The  Basis  of  Economics 

I.   Meaning  of  economics 
i .  What  it  studies 
2.  Kinds  of  wealth  : 

a.  Material  wealth 

b.  Immaterial  wealth 

II.    Characteristics  of  material  wealth 
i .  It  is  exchangeable 

2.  It  satisfies  human  wants 

3.  It  involves  labor 

III.   Free  gifts  of  nature  and  economic  goods 

1.  Meaning  of  free  gifts 

2.  Meaning  of  economic  goods 

3.  Position  of  money 

4.  Conclusion 

Meaning  of  Economics.  —  The  commanding  position  of 
economics  in  the  world  to-day  and  its  vital  connection 
with  American  life  make  it  highly  desirable  for  what  it 
all  wide-awake  people  to  understand  something  studies- 
of  this  subject  and  to  grasp  clearly  the  basis  upon  which  it 
rests.     Economics  arises  from  the  study  of  material  wealth 


2  American  Economic  Life 

and  investigates  the  problem  of  welfare.  Welfare,  from 
the  standpoint  of.  material  well-being,  is  not  possible  with- 
out material  wealth.;  Therefore,  in  order  to  understand 
the  concrete  basis  of  economics,  we  must  have  a  clear  con- 
ception of  the  meaning  of  wealth. 

Wealth  may  be  either  material  or  immaterial.  For 
example,  houses,  factories,  food,  and  clothing  are  articles 

d  of  material  wealth ;   while  health,  capacity,  and 

wealth:  character  are  illustrations  of  immaterial  wealth. 
Material  and  Both  kinds  of  wealth  possess  value,  but  im- 
material differs  from  material  wealth  in  that  it 
cannot  be  subjected  to  the  process  of  exchange ;  that  is,  t 
immaterial  wealth  cannot  be  bought  and  sold  like  food 
and  clothing.  It  is  needless  to  say  that  immaterial  wealth 
is  of  greater  value  than  anything  else  in  life.  However, 
a  study  of  this  kind  of  wealth  does  not  properly  belong  to 
the  field  of  economics,  but  is  a  legitimate  part  of  the  science 
of  education,  or  of  psychology,  or  of  ethics,  or  of  some 
similar  study.  Nevertheless,  when  immaterial  wealth  is 
productive  of  material  wealth,  economics  becomes  indirectly 
interested  in  the  solution  of  some  of  its  problems.  For 
example,  if  education  produces  efficiency  and  if  efficiency 
results  in  the  production  of  material  wealth,  economics 
acquires  an  indirect  but  vital  interest  in  the  growth  of 
education.  That  is,  just  as  wealth  is  a  means  of  promoting 
welfare,  so  may  education  increase  the  amount  of  wealth 
produced  by  society. 

Characteristics  of  Material  Wealth.  —  Since  economics 
is  primarily  concerned  with  material  wealth,  it  is  imperative 
it  is  ex-  for  the  student  of  economic  problems  to  have  a 
changeable.  ciear  conception  of  its  essential  characteristics. 
In  the  first  place,  material  wealth  may  be  bought  and  sold ; 


The  Basis  of  Economics  3 

that  is,  its  ownership  may  be  transferred  from  one  in- 
dividual to  another.  We  have  just  seen  that  this  char- 
acteristic distinguishes  material  wealth  from  immaterial 
wealth.  The  strength  of  a  Hercules,  the  genius  of  a 
Shakespeare,  or  the  honesty  of  a  Lincoln  can  never  be 
transferred  from  one  person  to  another.  On  the  other 
hand,  the  palaces  of  kings,  the  paintings  of  old  masters, 
or  the  products  of  a  steel  mill  may  easily  pass  from  the 
hands  of  one  into  the  possession  of  another.  It  is  always 
possible,  therefore,  for  material  wealth  —  no  matter  what 
its  character  or  how  high  its  value  —  to  be  exchanged  for 
some  other  commodity  of  equal  value. 

But  material  wealth  possesses  something  more  than  this 
element  of  transferability  or  exchangeability ;  it  possesses 
the  quality  of  satisfying  human  wants.  Some  It  satisfies 
things  are  easily  transferred  from  one  person  to  human 
another,  or  from  one  place  to  another,  and  yet 
do  not  satisfy  any  individual  want.  For  example,  the  dirt 
of  the  street  is  only  too  easily  brought  into  the  home, 
but  it  is  not  material  wealth  because  it  satisfies  no  one's 
want.  However,  this  same  dirt,  needed  by  the  contractor 
in  large  quantities,  would  satisfy  an  individual  want  and 
would  in  this  case  be  regarded  as  material  wealth.  This 
want-satisfying  quality  possessed  by  material  wealth  is 
called  utility.  While  degrees  of  utility  possessed  by 
different  articles  may  vary  greatly,  yet  all  forms  of  material 
wealth  must  possess  some  utility.  It  may  readily  be 
seen  that  the  necessaries  of  life,  such  as  food,  housing,  and 
clothing,  possess  the  greatest  possible  utility ;  that  is,  they 
satisfy  wants  that  are  most  intense  and  universal  in  all 
mankind.  On  the  other  hand,  automobiles,  books,  or  fine 
pictures   satisfy   wants   that   individuals   have   gradually 


4  American  Economic  Life 

acquired,  but  that  are  not  absolutely  essential  to  life 
itself.  In  both  cases,  however,  these  different  forms  of 
material  wealth  possess  utility ;  that  is,  they  all  satisfy,  in  a 
greater  or  less  degree,  the  wants  of  mankind. 

In  addition  to  the  qualities  of  exchangeability  and  utility, 
material  wealth  must  possess  still  another  characteristic, 
it  involves  The  wealth  with  which  economics  is  primarily 
labor.  concerned  must  involve  human  effort.     Loco- 

motives, footballs,  chemical  apparatus,  maps,  textbooks, 
clothing,  and  thousands  of  other  commodities  are  all 
produced  by  man's  conscious  industrial  effort;  that  is, 
they  are  all  "  economic  goods."  In  the  same  manner,  in 
the  production  of  commercial  coal  and  iron  and  in  the  work- 
ing up  of  other  raw  materials  of  industry,  man's  labor  is  an 
essential  element  in  the  process  required  for  developing 
the  finished  product.  When  this  element  is  lacking,  the 
goods  are  not  economic  but  free. 

Free  Gifts  of  Nature  and  Economic  Goods.  —  When  in- 
dividuals appropriate  gifts  of  nature,  such  as  forests  and 
Meaning  of  minerals,  they  transform  them  through  their 
free  gifts.  industrial  effort  into  economic  goods.  On  the 
other  hand,  such  free  gifts  of  nature  as  air  and  sunshine 
cannot  easily  be  appropriated,  and,  although  they  possess 
the  highest  possible  utility,  their  existence  is  not  the  result 
of  any  human  effort.  Air  and  sunlight  are  not  manu- 
factured; therefore,  we  cannot  properly  regard  them  as 
economic  goods.  Water,  on  the  other  hand,  while  a  free 
good  in  primitive  society,  becomes  an  economic  good  in 
the  modern  city,  because  human  effort  has  been  expended 
in  building  aqueducts,  laying  water  mains,  and  in  other- 
wise providing  machinery  for  a  water  supply.  Free  gifts 
of  nature  tend  to  become  economic  goods ;  but,  so  long  as 


The  Basis  of  Economics  5 

they  remain  "  free,"  they  do  not  constitute  a  part  of  that 
wealth  with  which  the  study  of  economics  is  primarily 
concerned.  The  main  interest  of  the  student  of  economics 
is,  therefore,  in  economic  goods. 

From  our  previous  analysis  of  wealth  it  may  be  seen  that 
material  wealth  is  a  term  applied  to  all  economic  goods ; 
that  is,  to  all  those  goods  (1)  which  possess  the  . 

power  of  exchangeability  or  the  quality  of  trans-  economic 
ferability  of  ownership,  (2)  which  possess  utility  g0°  s* 
or  the  power  to  satisfy  human  wants,  and  (3)  which  involve 
human  labor  or  industrial  effort.  They  are  distinguished 
from  free  gifts  of  nature  chiefly  by  reason  of  the  fact  that 
human  labor  has  been  expended  upon  them.  But  when 
man  acquires  ownership  in  natural  gifts  and  expends  labor 
upon  them,  they  become  economic  goods  because  their 
ownership  may  be  transferred  from  one  person  to  another. 
This  is  at  present  the  case  with  land  in  all  highly  civilized 
societies.  Furthermore,  the  term  economic  goods  is  some- 
times made  to  include  not  only  commodities,  such  as  wheat 
and  petroleum,  but  personal  services,  such  as  those  rendered 
by  physicians,  lawyers,  and  teachers.  These  personal 
services  are  treated  by  the  economist  as  economic  goods 
because,  while  they  are  not  actually  transferable,  they  may 
be  offered  for  sale  in  every  business  community,  that  is, 
they  may  be  exchanged  for  money. 

The  beginner  in  the  field  of  economics  must  bear  in 
mind  not  only  this  concept  of  economic  goods,  but  he  must 
also  clearly  understand  the  relation  between  Position  of 
wealth  and  money.  One  of  the  first  errors  into  money- 
which  he  is  likely  to  fall  is  the  belief  that  these  two  are 
synonymous,  and  that,  therefore,  a  study  of  economics 
is  merely  a  study  of  "  How  to  make  money."     Such  a 


6  American  Economic  Life 

misconception  should  be  immediately  corrected.  Material 
wealth  includes  infinitely  more  than  money,  and  the  study  of 
economics  is  therefore  infinitely  broader  than  an  ordinary 
lesson  in  money-making.  The  popular  misconception  of 
the  importance  of  money  arises  from  the  simple  fact  that 
money  is  employed  by  civilized  societies  as  a  standard 
for  measuring  the  value  of  all  economic  goods  and  as  a 
means  of  exchanging  one  form  of  wealth  for  another.  Gold 
and  silver,  from  which  money  is  coined,  are  forms  of 
material  wealth ;  but  so  are  iron  and  coal,  furniture  and 
clothing,  food  and  drink,  books  and  pictures,  and  countless 
other  economic  goods.  It  is,  therefore,  just  as  absurd  to 
think  of  money  as  inclusive  of  all  wealth  as  to  think  of 
one  individual  as  embracing  the  human  race. 

Material  wealth,  then,  is  the  concrete  basis  of  economics. 
Without  material  wealth  no  science  of  economics  would 
„     ,    ,        be  possible.     But  a  knowledge  of  wealth,  in  and 

Conclusion.  . 

of  itself,  is  not  the  highest  aim  subserved  by  a 
study  of  economics.  Wealth  is  but  a  means  to  welfare, 
and  the  real  purpose  of  the  study  of  economics  is  to  under- 
stand how  welfare  may  be  promoted  through  the  medium 
of  wealth.  Accordingly,  in  our  treatment  of  American 
economic  life,  we  shall  discuss  (i)  the  ideals  necessary  to 
attain  this  goal  of  welfare ;  (2)  the  means  of  promoting 
welfare  through  the  consumption,  production,  exchange, 
and  distribution  of  wealth ;  and  (3)  the  organized  efforts 
of  men  to  attain  the  economic  goal  for  which  society  is 
striving. 

QUESTIONS  FOR  RECITATION 

1.  What  is  economics ?    What  is  its  distinctive  characteristic? 

2.  Explain  the  difference  between  material  and  immaterial 
wealth.    Is  the  gap  between  them  impassable  ? 


The  Basis  of  Economics  7 

3.  In  what  two  respects  are  material  and  immaterial  wealth 
alike  ? 

4.  Give  two  examples  of  immaterial  wealth  which  might  legiti- 
mately command  the  interest  of  the  student  of  economics.  Explain 
clearly. 

5.  Describe  the  characteristics  of  material  wealth.  Give  an 
example  of  each. 

6.  What  is  the  difference  between  free  goods  and  economic 
goods?     Give  illustrations. 

7.  What  is  the  relation  between  material  wealth  and  money? 
Which  is  the  more  important?    Why? 

8.  Discuss  the  relation  between  wealth  and  welfare.  Which,  if 
either,  of  these  two  ideas  is  more  beneficial  to  society?  Show  by 
citing  examples  of  each. 

9.  Must  material  wealth  always  possess  the  three  characteristics 
mentioned  in  the  chapter  ?    Why  ? 

10.  Why  are  houses  regarded  as  economic  goods?  Can  they  be 
transferred? 

n.  Why  are  economic  goods  sometimes  made  to  include  personal 
services  ?    Are  they  exchangeable  ? 

PROBLEMS   FOR  DISCUSSION 

1.  Compare  the  physical  sciences  with  the  social  sciences,  giving 
examples  of  each  group  and  showing  wherein  the  two  groups  differ. 

2.  Distinguish,  by  giving  examples,  between  the  problems  of: 
a.  Economics  and  history,  b.  Economics  and  civics,  c.  Economics 
and  sociology. 

3.  Discuss  the  effects  of  the  World  War  upon  the  study  of  eco- 
nomics. 

4.  Explain  clearly  which  of  the  following  are,  and  which  are  not, 
economic  goods : 

a.  Fish  in  the  sea.  g.   Air  in  the  classroom. 

b.  Manhattan  Island.  h.  Air  in  a  submarine. 

c.  Dandelion  on  the  lawn.  i.   A  school  building. 

d.  A  prison.  /.   Climate. 

e.  Opium.  k.  A  barber's  services. 
/.   Niagara  Falls.  /.  Poison  gas. 


8  American  Economic  Life 

5.  Discuss  the  relative  importance  of  money,  roads,  and  food. 
Which  could  a  nation  do  without  the  better  ?    Why  ? 

6.  Name  an  American  preeminent  in  wealth  production ;  name 
another  whose  life  has  been  devoted  to  the  promotion  of  welfare. 
Discuss  the  services  rendered  by  each  to  the  community. 

7.  Is  knowledge  transferable?  Is  it  material  or  immaterial 
wealth  ?    What  has  the  teacher  for  sale  ? 

8.  Explain  the  meaning  of  utility.  Discuss  its  relation  to  ma- 
terial wealth.  Is  everything  that  possesses  utility  an  economic 
good? 

9.  Name  some  things  which  are  economic  goods  at  one  time, 
but  not  at  another  time.    Tell  why  in  each  case. 

10.   Why  is  industrial  effort  a  necessary  characteristic  of  economic 
goods  ? 

SUPPLEMENTARY  READING 

Clark,  J.  B.     The  Philosophy  of  Wealth,  Chaps.  I  and  III. 
Clay,  H.     Economics  for  the  General  Reader,  Chap.  XXIII. 
Ely,  R.  T.    Outlines  of  Economics,  Chaps.  I  and  VII. 
Gide,  C.     Principles  of  Political  Economy,  pp.  1-43. 
Seager,  H.  R.     Introduction  to  Economics,  Chap.  I,  pp.  1-2. 
Thompson,  CM.    Elementary  Economics,  Chap.  I. 


CHAPTER  II 

The  Goal  of  Economics 

I.   What  is  our  goal  ? 
i .   In  play : 

a.   Success 
•    b.  Achievement 

2.  In  life: 

a.  The  production  of  wealth 

b.  The  promotion  of  welfare 

3.  The  old  view  and  the  new 

II.   How  to  attain  this  goal 

1.  Through  opportunity : 

a.  Its  meaning 

b.  Its  possibilities  in  America 

c.  Its  real  significance  : 

(1)  The  older  attitude 

(2)  The  newer  view 

(3)  An  example 

2.  Through  adjustment : 

a.  Its  meaning 

b.  Its  existence  in  nature 

c.  Its  never-ending  character 

d.  Conclusion 

What  is  Our  Goal  ?  —  A  football  team  may  aim  to  pile 
up  a  big  score,  or  it  may  aim  to  play  a  good  game.     The 
big  score  is  success;   the  good  game  is  achieve-  inpiay: 
ment.     The    team    that   aims    to   pile   up   big  Success  or 

..vi  .         achievement. 

scores    wants    games    with    weak    opponents; 
but  the  team  that  aims  to  play  a  good  game  desires  in  its 

9 


io  American  Economic  Life 

adversaries  equal,  if  not  greater,  skill.  The  "  big-score  " 
team  triumphs,  while  the  "  good-game  "  team  learns.  The 
latter  may  lose  every  game  of  the  season,  and  yet  attain  a 
proficiency  in  football  far  above  that  of  the  former  team. 
It  is  thus  entirely  possible  to  play  ball  for  scores,  or  to 
play  for  the  love  of  a  good  game.  Exactly  the  same 
inlif  •  Th  possibilities  present  themselves  in  the  economic 
production      world,  except  that  the  choices  are  rather  more 

of  wealth.  ,  . 

numerous  and  complex.  Here  a  man  may 
strive  for  money,  the  counters  of  the  economic  game,  and, 
like  the  miser,  hoard  them  and  gloat  over  them.  Or  he 
may  overlook  the  counters  and  work  for  the  things  which 
the  counters  represent,  —  the  wealth  of  society.  In  his 
struggle  for  the  accumulation  of  this  wealth,  he  may 
disregard  the  rights  of  others  and  put  to  shame  his  own 
ideals.  His  one  aim  may  be  to  amass  a  great  fortune,  to 
possess  great  riches.  If  his  purpose  is  merely  to  produce 
vast  wealth,  simply  for  the  sake  of  that  wealth  and  without 
regard  for  the  rights  of  others,  he  is  on  the  same  moral 
plane  as  the  ball  player  who  is  determined  to  win  the 
game  at  any  cost,  even  to  the  "  spiking  "  of  his  opponent. 
Many  men,  however,  have  as  the  chief  object  in  life  the 
attainment  of  progress,  —  a  forward  movement  of  the 
The  entire  group  to  which  they  belong.     If  a  large 

promotion  group  is  striving  for  progress,  civilization  will 
be  advanced  and  the  welfare  of  each  member 
of  the  group  will  be  promoted.  Of  course,  in  order  to 
attain  this  welfare,  it  will  be  necessary  to  use  money  and 
wealth  in  order  to  satisfy  the  wants  of  the  individual ; 
yet  there  is  just  as  wide  a  difference  between  working  for 
wealth  and  working  for  welfare  as  there  is  between  playing 
ball  for  scores  and  playing  to  play  a  good  game.     In  the 


The  Goal  of  Economics  n 

first  case  man  works  for  counters;    in  the  second,  for 
development. 

Economics  is  not  merely  "  the  science  of  wealth,"  but 
is  becoming  more  and  more  "  the  science  of  welfare." 
The  early  idea  of  economic  writers  was  that  The  old  view 
economic  goods  are  the  logical  end  of  economic  and  the  new. 
endeavor;  that  the  nation  which  is  producing  economic 
goods  in  great  abundance  is  a  successful  nation,  irrespective 
of  any  other  test.  The  newer  view  holds,  on  the  other  hand, 
that  true  advancement  lies,  not  in  the  production  of  goods, 
but  in  developing  the  lives  of  men  and  women ;  and  that, 
while  this  end  may  sometimes  be  achieved  through  the 
production  of  wealth,  the  production  is  merely  incidental 
to  the  development  of  manhood  and  womanhood.  Produc- 
tion is  not  an  end  in  itself,  but  merely  a  means  to  welfare. 

How  to  Attain  This  Goal.  —  Since  the  attainment  of 
welfare  —  individual  and  social  well-being  —  is  the  end 
of  economic  endeavor,  it  becomes  the  duty  of  society  to 
provide  the  means  to  attain  this  end.  •  Many  conditions 
are  needed  to  realize  the  goal  of  welfare,  but  there  are  two 
requisites  of  progress  which  appear  fundamental.  In 
order  that  man  may  attain  that  for  which  he  is  striving 
society  must  (i)  provide  opportunity  for  the  individual, 
and  (2)  make  the  adjustments  necessary  for  his  progressive 
development. 

Opportunity  is  an  equal  chance  given  to  the  members  of 
each  generation  to  become  unequal.  Far  from  signifying 
equality,  opportunity  involves  only  the  thought  ThroUgh 
that  each  person  shall  have  an  equal  start,  opportunity: 
The  "starter,"  who  shoots  the  pistol  for  the  **"*""»*• 
mile  run,  does  not  make  the  runners  equal  when  he  insists 
that  each  start  at  the  same  time  from  the  same  mark.     On 


12  American  Economic  Life 

the  contrary,  he  gives  the  contestants  a  fair  chance  to  show 
how  unequal  they  are.  Those  who  urge  the  necessity  of 
opportunity  are  doing  no  more  than  the  "  starter,"  — - 
insisting  that  each  contestant  in  the  race  of  life  shall  start, 
fully  prepared,  with  an  equal  chance  to  do  good  work. 

As  a  nation,  America  to-day  presents  rare  opportunities. 
Contrast,  for  a  moment,  the  conditions  of  the  eighteenth 
its  tossi-  centurv  with  those  of  the  twentieth.  In  1700 
unties  in  capital  was  scarce,  living  was  precarious,  and, 
in  order  to  secure  even  the  bare  necessities  of 
life,  men,  women,  and  children  were  forced  to  work  hard 
and  continually.  To-day,  however,  the  inhabitants  of  the 
United  States  have  stored-up  capital  and  a  well-developed 
system  of  wealth  production.  The  bare  necessities  of  life 
and  some  of  the  comforts  as  well,  can  be  supplied  in  an 
eight-hour  working  day  for  adults,  while  the  children 
attend  school.  In  1700  the  possibilities  for  opportunity 
were  limited ;  to-day  they  have  increased  a  hundredfold. 

The  real  significance  of  this  new  opportunity  is  made 
clearer  by  the  modern  view  of  man's  possibilities.  Modern 
its  real  sig-  science  justifies  the  belief  that,  within  racial 
nificance.  lines,  most  men  are  born  approximately  equal 
and  normal;  hence  opportunity  is  the  chief  factor  in 
human  development.  But  this  view  was  not  always  held. 
Even  to-day  some  people  believe  in  total  depravity. 
Under  this  hopeless  view  of  the  human  race,  some  men  are 
depraved,  sinful,  wicked;  others  are  shiftless,  lazy,  in- 
efficient, and  poor ;  while  only  the  fortunate  ones  are  wise, 
capable,  and  efficient.  During  the  centuries  when  this 
view  was  prevalent,  birth  was  looked  upon  as  the  deter- 
mining factor  in  human  development.  This  attitude 
toward  life  was  an  attempt  to  justify  existing  conditions ; 


The  Goal  of  Economics  13 

it  led  to  submission  and  despondent  resignation.     It  was 
all  but  fatalistic. 

In  the  course  of  time,  however,  thinkers  arose  and 
proclaimed  the  doctrine  of  man's  natural  capacity.  Such 
men  talked  of  the  right  to  life,  liberty,  and  the  pursuit  of 
happiness,  and  asserted  that  all  men  are  created  free  and 
equal.  Equalize  opportunity,  proclaimed  these  "  free 
and  equal  "  thinkers,  and,  to  a  great  extent,  you  equalize 
achievement.  Birth  —  heredity  —  was  no  longer  the  key 
to  the  situation ;  this  was  now  to  be  found  in  opportunity 
and  environment.  This  view  of  human  life  is  full  of  prom- 
ise and  inspiration,  transforming  men  from  fatalists  into 
enthusiastic  workers.  According  to  its  teaching,  perhaps 
nine-tenths  of  all  men  and  women,  in  a  given  grade  of 
civilization,  are  born  with  about  the  same  capacity  to  do 
good  work. 

Take,  for  example,  two  boys  of  equal  ability,  born  on  the 
same  day.  In  the  course  of  their  lives,  one  is  sent  to  high 
school  and  college  and  does  splendid  work  in  the  world; 
the  other  is  badly  fed,  poorly  clothed,  and  sent  into  a 
cotton  factory  at  an  early  age.  The  first  boy,  because  he 
had  a  chance,  developed  in  exactly  the  same  way  that  the 
second  boy  would  have  developed  had  a  chance  been 
given  to  him.  An  overwhelming  majority  of  people,  like 
these  two  boys,  are  normal  at  birth  and,  if  given  an  oppor- 
tunity, will  lead  normal,  happy  lives. 

To  make  opportunity  more  effective,  society  must  make 
certain  changes  in  ideas  and  conditions  that  have  been 
inherited  from  a  far  distant  past.  This  process  Through 
of  changing  past  conditions  so  that  they  will  adjustment: 
meet  man's  present  needs  is  called  social  adjust-  Its  meamn&' 
ment.     For  example,  it  is  not  sufficient  that  society  pro- 


14  American  Economic  Life 

vide  young  men  and  women  with  an  opportunity  for  edu- 
cation. This  education  itself  must  suit  the  needs  of  the 
present-day  individual.  If  the  education  offered  is  out  of 
harmony  with  the  needs  of  the  time,  the  opportunity  pro- 
vided fails  of  its  real  purpose.  Under  such  circumstances 
society  must  make  an  adjustment  in  education;  that  is, 
it  must  change,  for  this  work-a-day  world,  the  old  idea  that 
education  must  always  take  the  form  of  pure  culture  and 
learning.  In  other  words,  our  educational  system  must  be 
reorganized  if  it  does  not  meet  the  requirements  of  the  new 
age.  This  is  accomplished  by  the  process  of  social  adjust- 
ment which  aims  to  bring  about  a  normal  relation  between 
man  and  his  social  environment.  However,  it  is  the  environ- 
ment, not  the  individual,  which  suffers  this  change.  The 
aim  of  social  adjustment,  therefore,  is  to  change  unfavor- 
able conditions  so  that  men  and  women  may  be  free,  when 
provided  with  opportunity,  to  realize  life's  full  possibilities. 
The  phenomenon  of  adjustment  is  seen  in  nature  as  well 
as  in  society.  A  river,  for  example,  adjusts  itself  to  the 
its  existence  changes  in  earth  formation.  If  a  mountain 
tn  nature.  range  is  thrown  up,  the  river  wears  down  its 
bed  until,  flowing  at  a  normal  gradient,  it  has  created 
a  canon  of  the  Colorado.  But  the  river  is  not  content. 
It  continues  its  work,  cutting  away  the  surrounding  hills, 
until  it  flows  through  a  great  plain  like  the  Mississippi 
Valley.  Society,  like  the  river,  seeks  to  adjust  itself  to 
the  changing  contour  of  the  environment  by  wearing  it 
away,  and  smoothing  it  down,  until  a  normal  relation  is 
established  between  men  and  their  surroundings.  It 
accomplishes  its  purpose  by  means  of  men  and  women 
all  working  together,  cooperating  to  remove  the  obstacles 
in  the  path  of  progress. 


The  Goal  of  Economics  15 

The  process  of  adjustment  is  continuous  because  the 
normal  is  always  changing.  The  unattainable  of  one  age 
is  the  attainable  of  the  next.     Through  science, 

.  .  Itsnever- 

invention,  education,  and  the  creation  of  surplus  ending  char- 
wealth,  the  dreams  of  the  past,  —  the  abolition  of 
slavery,  freedom  from  overwork,  from  cold  and  hunger,  from 
famine  and  pestilence,  —  become  the  realities  of  the  present. 
Thus  the  possibilities  of  human  life  are  ever  widening. 

Men  and  women,  therefore,  who  have  the  welfare  of 
society  truly  at  heart  are  continually  striving  to  shape 
social   conditions   so   that   every   one   may   be 

.  Conclusion. 

happiest  and  most  effective.  If  enough  people 
work  for  such  an  end,  the  full  possibilities  of  society  will 
be  realized  and  the  normal  for  that  community  will  be 
attained.  But  to  arrive  at  this  goal  of  economic  life  — 
to  realize  individual  and  social  welfare  —  society  must 
not  only  secure  adjustment,  but  it  must  also  provide 
opportunities  for  all  its  members. 

QUESTIONS   FOR  RECITATION 

1.  Do  you  want  your  school  teams  to  win  at  any  cost?  Ex- 
plain your  answer. 

2.  Is  it  possible  to  attain  both  success  and  achievement ?    How? 

3.  Explain  the  difference  between  the  production  of  wealth  and  the 
promotion  of  welfare.     Show  how  the  former  is  necessary  to  the  latter. 

4.  What  has  economics  to  do  with  the  promotion  of  welfare? 
Was  this  view  always  held? 

5.  Define  opportunity. 

6.  Give  original  examples  of  opportunity. 

7.  Explain  the  possibilities  for  opportunity  in  the  United  States. 
What  has  the  United  States  yet  to  accomplish  in  this  direction? 

8.  Why  do  modern  views  of  life  enhance  the  importance  of  op- 
portunity?    Explain  clearly. 

9.  Define  social  adjustment.     Give  examples. 


1 6  American  Economic  Life 

10.   How  is  it  accomplished  ? 

ii.   How  does  Nature  bring  about  physical  adjustment?     Give 
examples. 

12.  Show  clearly  why  the  process  of  social  adjustment  is  never- 
ending. 

13.  At  what  periods  in  our  history  have  we  had  the  most  important 
social  adjustments  ?    Why  ? 

PROBLEMS   FOR  DISCUSSION 

1.  Discuss  life's  true  goal.     Give  examples  from  great  men  of 
history. 

2.  What   good   does   the   miser   do   society?     The   tight-fisted 
business  man  ?     The  public-spirited  worker  ? 

3.  What  choices  in  life  are  open  to  you?    Which  will  you  take? 
Give  your  reasons. 

4.  Would  you,  or  would  you  not,  be  willing  to  take  an  easy  job 
with  a  big  salary  ?     Why  or  why  not  ? 

5.  What  great  industrial  leader  appeals  to  you?     Why? 

6.  Contrast  your  present  opportunities  with  those  that  would 
have  been  open  to  you  had  you  been  born  in  China. 

7.  Should   any  limit   be   placed   on  opportunity?     State   your 
reasons. 

8.  Would  not  the  opportunity  of  the  few  be  limited  if  opportunity 
were  provided  for  the  many  ?    Explain. 

9.  Contrast  individual  with  social  adjustment.     Give  examples. 

10.  Explain  the  most  important  social  adjustments  needed  in 
America  to-day. 

11.  Contrast  India  with  the  United  States  in  regard  to  social 
adjustments.     Give  examples. 

12.  How  do  you  regard  prohibition  and  woman  suffrage ?    Why? 

SUPPLEMENTARY  READING 

Clay,  H.     Economics  for  the  General  Reader,  Chaps.  XXIV-XXV. 

Devine,  E.  T.    Social  Forces,  Chaps.  I,  V,  and  VI. 

Jenks,  J.  W.     Governmental  Action  for  Social  Welfare,  Chap.  I. 

Pigou,  A.  C.     Wealth  and  Welfare. 

Ross,  E.  A.    Sin  and  Society,  Chap.  VI. 

Seager,  H.  R.    Social  Insurance,  Chaps.  I  and  VI. 


CHAPTER  III 

Economic  Ideals 

I.   Efficiency 

i.   Its  meaning 

2.  Its  importance : 

a.  To  the  employer : 
(i)  Examples 

(2)  How  measured 

b.  To  the  worker  : 

(1)  Grades  of  workers 

(2)  A  great  danger 

c.  To  the  nation : 

(1)  Why  necessary 

(2)  An  example 

d.  To  the  family: 

(1)  Why  important 

(2)  The  new  movement 

3.  How  secured 

II.   Conservation  and  thrift 

1.  Meaning  of  conservation 

2.  Its  threefold  aspect: 

a.  Conservation  of  natural  resources 

(1)  Forests 

(2)  Minerals  and  water  power 

b.  Conservation  of  industry 

c.  Conservation  of  vitality : 

(1)  Health 

(2)  Life 

3.  Thrift: 

a.  Meaning  and  necessity 

b.  The  great  gain 

4.  Conclusion 

17 


1 8  American  Economic  Life 

Efficiency.  —  Efficiency    is    the    capacity    to    secure    a 

maximum  return  for  a  minimum  outlay.     Hence,  one  man 

is  more  efficient  than  another  if,  with  a  given 

Its  meaning.  .  ,  ,     , 

expenditure  of  energy,  tune,  and  material,  he 
can  produce  a  larger  or  better  result  than  the  other.  For 
example,  where  two  men  are  making  Belgian  blocks,  one 
produces  sixty,  while  the  other,  during  the  same  period 
of  time  and  without  putting  forth  any  additional  effort, 
makes  a  hundred.  The  first  man  is  clumsy  with  his 
hammer ;  the  second  makes  every  blow  count.  The 
second  man  is  therefore  more  efficient  than  the  first. 

Every  progressive  employer  is  interested  both  in  his 
own  efficiency  and  in  that  of  his  workmen.  In  fact,  the 
Tx   .  efficiency  of  his  employees  is  a  measure  of  his 

Its  impor-  J  f     J 

tance :    To    own  capacity ;  for,  unless  he  secures  a  maximum 
/  e  emp  oyer.  re{-urn  for  a  minimum  outlay  of  administrative 

ability,  he  himself  is  inefficient.  If  he  has  a  man  soldering 
lanterns  who  makes  ten  motions  to  the  lantern,  while  the 
job  can  be  done  in  eight,  he  is  losing  some  product  every 
hour  of  the  day  through  this  man's  inefficiency.  Or,  if  he 
is  using  old,  out-of-date  machinery  when  more  effective 
machinery  can  be  secured,  or  if  his  business  has  not  been 
scientifically  systematized,  he  is  inefficient  because  he  is 
failing  to  secure  a  maximum  return  for  a  minimum  outlay. 
So  important  has  become  this  principle  of  efficiency  that 
the  success  of  the  business  man  is  measured  in  terms  of  this 
principle.  The  term  "  scientific  management  of  industry  " 
is  employed  to  denote  the  extent  to  which  this  principle  is 
recognized  in  the  management  of  large  undertakings.  The 
old  haphazard  way  of  doing  business  has  disappeared  from 
all .  progressive  establishments.  Large  sums  of  money 
are  paid  for  the  services  of  "  efficiency  experts,"  whose  duty 


Economic  Ideals  19 

it  is  to  devise  the  most  effective  methods  of  conducting 
the  business  and  turning  out  the  product.  Workers 
themselves  are  tested  by  tracing  their  curves  of  efficiency, 
so  that  production  may  reach  its  greatest  volume.  Indeed, 
in  modern  large-scale  production,  one  of  the  chief  functions 
of  the  head  of  a  great  organization  is  to  find  "  the  right 
man  for  the  right  job  "  in  order  that  the  best  and  the  great- 
est industrial  results  may  be  achieved. 

The  worker  is  no  less  interested  in  efficiency  than  his 
manager,  because  his  welfare  is  equally  dependent  upon 
it.  Workers  are  divided  into  groups,  whose  To  the 
boundaries  are  measured  in  terms  of  efficiency.  worker- 
At  the  bottom  are  those  who  are  living  on  the  ragged  edge 
of  existence,  who  are  always  losing  their  positions  because 
of  their  inefficiency.  Then  come  those  who  "  stick,"  who 
retain  their  positions  but  never  rise.  Next  come  those 
who  advance,  but  slowly.  Finally,  at  the  top,  are  those 
workers  who  are  always  advancing  and  progressing  because 
they  are  always  increasing  their  efficiency. 

It  is  well  here,  however,  to  remember  that  the  ideal  of 
efficiency,  like  many  other  desirable  principles,  may  be 
subverted  to  wrong  purposes.  This  occurs  in  what  is 
known  as  the  "  speeding  up  "  process,  in  which  the  health 
of  the  workers  is  sacrificed  for  increased  production. 
Efficiency  secured  at  the  cost  of  human  health  and  happiness 
is  not  efficiency  at  all.  By  breaking  down  the  worker  and 
thus  ultimately  curtailing  his  power  of  production,  such 
so-called  efficiency  defeats  the  very  purpose  for  which  the 
true  ideal  exists.  The  immediate  product,  therefore,  is 
not  always  the  true  test  of  real  efficiency. 

Efficiency  may  also  be  considered  from  the  standpoint 
of  the  nation.    Uncle  Sam  may  well  ask,  "  Is  this  country 


20  American  Economic  Life 

efficient?  Are  all  our  industries  doing  efficient  work? 
Are  our  railroads  efficiently  managed?  Is  our  school 
system  an  efficient  one  ?  " 

But  why  these  questions  ? 

Because,  in  the  general  reorganization  of  international 
industry  necessitated  by  the  changes  of  the  World  War, 
To  the  it  is  imperative  for  the  United  States,  if  she  would 

nation.  realize  the  full  possibilities  of  the  new  era,  to 

stand  first  in  national  efficiency.  In  the  struggle  for  world 
markets  and  in  the  demand  for  increased  production,  the 
United  States  can  attain  the  commanding  position,  which 
her  natural  wealth  justifies,  only  by  insisting  upon  the 
highest  ideals  of  national  efficiency.  Production  must 
reach  the  largest  volume  consistent  with  national  well- 
being;  goods  must  be  efficiently  distributed  through  the 
arteries  of  commerce ;  foreign  trade  must  be  organized 
in  the  most  effective  manner ;  and  industrial  education 
must  reflect  the  ideals  of  the  new  period. 

Many  good  illustrations  of  what  has  been  accomplished 
through  national  efficiency  may  be  taken  from  American 
industries  which  have  really  reached  the  stage  of  inter- 
national organization.  One  of  the  greatest  of  these  is  the 
United  States  Steel  Corporation.  In  this  business,  indus- 
trial efficiency  has  attained  such  a  high  degree  of  develop- 
ment that  world  markets  have  been  provided  for  its  prod- 
uct. American  steel  rails  not  only  compete  with  the 
English  product,  but  at  times  drive  that  product  from  its 
home  market.  But  here  again,  we  should  remember  that 
such  a  dominating  position  ought  not  to  be  attained 
through  false  efficiency  that  disregards  the  best  interests 
of  the  labor  employed  in  the  industry  concerned. 

Finally,  we  may  look  at  efficiency  from  the  standpoint 


Economic  Ideals  21 

of  the  home.  If  it  is  necessary  that  the  father  be  able  to 
produce  efficiently  in  order  to  support  his  children,  it  is 
no  less  necessary  that  the  mother  buy  and  keep  To  the 
house  efficiently,  in  order  that  the  income  of  Jam%b- 
the  father  may  be  used  in  the  most  advantageous  manner. 
Efficiency  in  the  home  is  just  as  important  as  efficiency  in 
the  factory,  —  more  so,  perhaps,  in  view  of  the  many  bad 
digestions  and  spoiled  dispositions  that  have  grown  up 
with  inefficient  home  management. 

Many  evidences  are  seen  to-day  of  attempts  to  secure  this 
efficiency  in  the  home.  In  our  educational  system  the 
movement  extends  all  the  way  from  the  primary  system  to 
the  institutions  of  higher  learning.  In  the  elementary 
schools  we  find  courses  in  cooking  and  sewing ;  in  the  high 
schools,  domestic  science  courses ;  and  in  the  colleges  and 
universities,  courses  in  chemistry,  food-values,  and  allied 
subjects.  Household  budgets  are  studied  so  that  limited 
funds  may  be  spent  to  the  best  advantage,  while  among 
social  workers  special  attention  is  paid  to  giving  informal 
instruction  to  families  of  the  poor  in  "household  efficiency. " 

No  matter,  therefore,  from  what  standpoint  we  view  this 
question  we  see  its  far-reaching  importance ;  and  it  acquires 
this  importance  because  social  welfare  depends 
largely  on  efficiency.     When  a  nation  is  effi-  efficiency 
cient,  producing  many  goods  cheaply  and  easily,  1S  secure 
it  creates  the  possibility  of  universal  prosperity  in  which  all 
may  share.     How,  then,  may  this  efficiency  be  secured? 
An  analysis  of  this  problem  will  show  that  education  alone 
can   make   certain   the   realization   of   this  ideal.     Here, 
however,  it  may  be  necessary  to  revise  our  ideas  of  educa- 
tion.    Certainly  the  efficiency  for  which  we  are  striving 
cannot  be  secured  from  that  traditional  idea  of  education 


22  American  Economic  Life 

which  exalts  culture  at  the  expense  of  useful  knowledge. 
By  education  for  efficiency  we  mean  that  technical  and 
specialized  training  which  every  individual  must  possess 
in  order  to  discharge  life's  imperative  duties. 

Conservation   and   Thrift.  —  Conservation   means   wise 

use.     It  is   the   complement  of   efficiency.     Efficiency  is 

-  measured  by  a  maximum  of  results ;    conserva- 

Meaning   of  J .  ' 

conserva-  tion,  by  a  minimum  of  waste.  For  example,  in 
former  days,  when  business  was  conducted  on  a 
small  scale,  each  establishment  had  a  certain  amount  of 
waste  product  that  was  discarded  as  useless.  Now  the 
giant  corporation  utilizes  wisely  this  former  waste,  so  that, 
by  proper  conservation,  it  is  converted  into  valuable  by- 
products of  industry. 

In  the  public  mind,  however,  conservation  is  most 
closely  associated  with  our  natural  resources.  Here  it  was 
its  three-  that  Theodore  Roosevelt  idealized  this  move- 
fold  aspect:  ment  in  American  life.  He  saw  at  once  the 
great  danger  to  the  nation  that  would  result  from  the 
wanton  waste  of  natural  resources  and  from  their  exploita- 
tion for  private  gain.  He  brought  the  nation  to  a  realizing 
sense  of  the  great  danger  confronting  it  and,  thereby,  saved  it 
from  becoming  victimized  to  extravagant  waste  and  private 
monopoly.  But  the  term  conservation  may  be  applied  not 
only  (i)  to  natural  resources,  such  as  minerals,  forests,  and 
water  power,  but  also  (2)  to  industry,  and  (3)  to  vitality. 

The  conservation  of  natural  resources  began  with  the 

care  of  forests,  which  were  so  ruthlessly  destroyed  from 

colonial  times  to  the  end  of  the  nineteenth  cen- 

Conservation 

of  natural      tury.     Forests  had  been  literally  "  butchered," 

—  all  trees,  young  as  well  as  old,  being  cut  or 

destroyed.     Then,  too,  forest  fires  of  terrible  proportions 


Economic  Ideals  23 

raged  every  year  throughout  different  areas,  destroying 
lives  and  property,  as  well  as  completing  the  forest  de- 
struction which  the  timber  butchers  had  begun.  Gradually, 
as  the  forests  disappeared  and  the  price  of  lumber  rose,  it 
became  apparent  that,  unless  the  forest  waste  was  stopped, 
a  time  would  come,  and  that  very  shortly,  when  there 
would  be  an  appalling  shortage  of  lumber. 

Although  the  idea  of  conservation  of  natural  resources 
related  originally  to  forests,  it  has  been  expanded  until, 
to-day,  the  nation  is  fully  aroused  to  the  necessity  of  con- 
serving all  of  its  natural  wealth.  Forests,  even  if  per- 
manently destroyed,  might  be  replaced,  but  minerals  are 
not  replaceable;  and  water  power,  upon  which  industry 
must  more  and  more  depend  as  coal  rises  in  price,  may  be 
monopolized  and  taken  out  of  the  hands  of  the  people. 
Everywhere,  therefore,  conservation  is  essential. 

Industry,  too,  offers  opportunities  for  the  conservationist. 
For  years,  mining  companies  threw  carelessly  aside  the 
finer  bits  of  anthracite  coal  which  have  since  conservation 
proved  of  such  value  in  making  steam  for  office  <>j  industry. 
buildings  and  factories.  The  refuse  from  slaughterhouses, 
formerly  thrown  away,  is  now  converted  into  a  score  of 
different  kinds  of  products  in  great  packing  houses  that 
"  use  every  bit  of  a  hog  except  the  squeal."  Hoofs,  horns, 
hair,  bristles,  bones,  blood,  sinews,  fat,  hides,  intestines,  — 
all  have  some  destination ;  while  the  refuse  which  remains 
is  converted  into  fertilizer.  New  inventions,  perfected 
devices,  new  processes  of  manufacture,  all  help  in  the 
conservation  of  industry. 

Most  important  of  all  is  the  conservation  of  human  fife. 
Long  ago  Ruskin  pointed  out  that  men  and  women  are  a 
nation's  greatest  asset.     So  long  as  children  are  sacrificed 


24  American  Economic  Life 

to  factories,  so  long  as  men  and  women  toil  at  the  expense 
of  health  and  rightful  development,  and  so  long  as  the 
Conservation  public  health  is  sacrificed  to  ignorance,  man  will 
of  vitality.  never  attain  the  goal  of  welfare.  Hence,  if  a 
nation  would  be  truly  efficient  and  happy,  it  must  use 
wisely  the  men  and  women  of  each  generation.  This 
conservation  of  vitality  may  take  the  form  of  conserving 
health  or  of  conserving  life. 

If  sick  people  cannot  do  their  best  work,  a  nation  of  sick 
people  can  scarcely  be  described  as  efficient.  In  the 
United  States,  it  has  been  estimated  that  the  average 
adult  is  sick  in  bed  four  or  five  days  during  each  year ; 
while  headaches,  colds,  and  such  minor  ailments  keep  him 
from  work  another  three  or  four  days.  If,  then,  there  are 
thirty  million  adults  at  work  and  each  one  loses  seven 
days  a  year,  the  total  loss,  irrespective  of  the  loss  of  health 
and  the  cost  of  drugs  and  medical  attendance,  is  two  hun- 
dred and  ten  million  working  days  each  year.  If  half  of 
this  sickness  is  preventable,  the  nation  is  deliberately 
losing  more  than  a  hundred  million  working  days  annually 
because  of  its  failure  to  adopt  the  simplest  health  pre- 
cautions, such  as  clean  water,  pure  milk,  clean  streets,  and 
airy  houses. 

In  the  same  way,  the  average  length  of  life  might  be 
greatly  increased  by  preserving  health  and  preventing 
accidents.  Perhaps  half  of  the  deaths  occurring  annually 
in  the  United  States  are  preventable  and  would  be  pre- 
vented if  a  wise  conservation  policy  were  adopted.  At 
present,  the  average  length  of  life  in  the  United  States  is 
from  thirty-five  to  forty  years.     It  might  be  seventy. 

Another  form  of  conservation  is  found  in  the  ideal  of 
thrift.    With  the  advent  of  the  World  War  in  1914,  this 


Economic  Ideals  25 

ideal  came  to  occupy  a  prominent  place  in  American 
economic  life.  As  the  struggle  progressed,  it  became  in- 
creasingly evident  that  the  United  States  would  M  .r 

°  J  Thrift: 

have  to  send  food  and  other  necessary  supplies  to  Meaning 
those  European  nations  that  were  fighting  to  and 
maintain  the  supremacy  of  democratic  ideals. 
To  do  this,  it  was  necessary  for  the  nation  to  practice 
economy  and  to  use  wisely  its  abundant  wealth.     Every- 
where  was   seen  the  slogan  "  Food  will  win  the  war." 
The    nation    learned   anew    how  to    save    by   practicing 
economy    and    by    submitting    to    voluntary    rationing. 
When  the  war  was  won,  the  depletion  of  the  world's  re- 
sources further  emphasized  the  need  of  thrift.    The  neces- 
sity to  "  work  and  save  "  became  still  more  apparent  to 
all  thoughtful  men. 

The  great  gain  to  the  American  people  from  this  lesson 
of  war  was  found,  not  only  in  curbing  social  extravagance, 
but  also  in  the  general  discovery  of  the  practical  The  great 
value  of  the  power  of  substitution.  Heretofore,  gain- 
men  had  become  accustomed  to  use  such  staple  articles 
of  food  as  wheat,  beef,  and  sugar,  and  to  feel  that  no 
other  foods  could  serve  as  substitutes  for  them.  With 
continued  practice,  however,  they  soon  came  to  realize 
that  corn  could  be  substituted  for  wheat,  pork  for  beef, 
sirup  for  sugar,  and  rice  for  potatoes. 

From  this  general  survey  of  efficiency,  conservation,  and 
thrift,  the  student  of  American  economic  life  must  see 
the  tremendous  importance  of  individual  action  The  con- 
in  promoting  social  welfare.  It  is  not  sufficient  clusion- 
for  society  to  provide  men  and  women  with  opportunities ; 
nor  yet  to  make  the  adjustments,  in  order  that  the  oppor- 
tunities offered  may  meet  the  needs  of  the  present  time. 


26  American  Economic  Life 

These  are  only  the  first  steps  toward  the  attainment  of 
social  welfare.  The  individual  himself  must  hold  to  high 
standards  of  efficiency ;  he  must  insist  upon  high  ideals 
of  conservation ;  and  he  must  practice  economy  and  thrift. 
In  spite  of  all  that  society  may  do  for  him,  if  man  is 
inefficient,  extravagant,  or  wasteful,  he  will  never  attain 
the  goal  of  economic  welfare. 

QUESTIONS  FOR  RECITATION 

i.  Define  efficiency. 

2.  What  is  meant  by  a  "maximum  return"  ? 

3.  What  is  the  difference  between  true  and  false  efficiency? 
1 4.  Give  examples  of  false  efficiency. 

5.  Give  examples  of  true  efficiency. 

6.  Explain  the  importance  of  efficiency  to : 

a.  A  railroad  president. 

b.  A  salesman. 

c.  The  modern  housewife. 

d.  The  national  government. 

7.  Define  conservation.    Name  three  kinds. 

8.  Why  is  conservation  needed? 

9.  Give  examples  of  conservation. 

a.  In  natural  resources. 

b.  In  vitality. 

c.  In  industry. 

10.  If  conservation  benefits  the  future  only,  how  can  it  be  justi- 
fied? 

11.  What  is  thrift? 

12.  Is  the  miser  thrifty?    Explain. 

13.  Why  is  thrift  necessary? 

PROBLEMS   FOR  DISCUSSION 

1.  Discuss  the  relative  importance  of  different  economic  ideals 
in  the  United  States  to-day. 

2.  Compare  idealism  with  materialism  as  a  factor  in  national 
development  and  in  world  politics.     Give  examples  from  history. 


Economic  Ideals  27 

3.  Compare  British  efficiency  with  American  efficiency.     Give 
examples. 

4.  Discuss  the  idea  of  German  efficiency  before  the  World  War. 

5.  Give  the  history  of  the  conservation  movement  in  the  United 
States. 

6.  Discuss  the  evils  of  the  private  monopoly  of  mineral  lands 
and  water-power  sites. 

7.  Apply  the  principle  of  conservation  to  mankind. 

8.  Compare  France,  Holland,  and  the  United  States  in  regard  to 
the  practice  of  thrift.     Give  illustrations. 

9.  Discuss  the  importance  of  thrift  to : 

a.  The  family. 

b.  Industry. 

c.  The  nation. 

10.   Theodore  Roosevelt  said,  "Thrift  is  common  sense  applied  to 
spending."     Apply  this  to  your  own  everyday  expenditures. 

SUPPLEMENTARY  READING 

Annals  of  American  Academy  of  Political  and  Social  Science,  The 

New  American  Thrift,  January,  1920. 
Annals.     The  American  Industrial  Opportunity,  May,  191 5. 
Carver,  T.  N.    Principles  of  Political  Economy,  Chaps.  VI  and  IX. 
Taylor,  F.  W.     Principles  of  Scientific  Management. 
Van  Hise,  C.  R.     The  Conservation  of  Natural  Resources  in  the  United 

States,  pp.  1-14,  359-379- 


CHAPTER  IV 

Prosperity 

I.   Nature  of  prosperity 
i.   Its  meaning 

2.  Its  dangers 

3.  Its  twofold  character 

II.   National  prosperity 

1 .  China  and  United  States : 

a.  Population 

b.  Race 

c.  Natural  resources 

d.  Industrial  development 

e.  Transportation  facilities 
/.   Tradition 

g.    Control  over  environment : 

(1)  In  regard  to  rivers 

(2)  In  regard  to  food 

2.  Surplus  wealth: 

a.  Its  meaning 

b.  Forms 

III.    Individual  prosperity 

1.  Its  importance 

2.  An  example 

3.  Conclusion 

Nature  of  Prosperity.  —  Material  wealth  is  the  basis  of 
national  well-being.  A  people  who  are  inadequately 
its  mean-  nourished,  poorly  housed,  improperly  clothed, 
ing-  and   denied   the  legitimate  means  of  securing 

health  and  recreation,  cannot  be  said  to  enjoy  material 

28 


Prosperity  29 

well-being.  This  condition  can  be  brought  about  only 
through  the  medium  of  prosperity.  Prosperity,  therefore, 
signifies  an  abundance  of  economic  goods.  It  is  an  indi- 
cation of  welfare ;  just  as  fame  and  honor  are  signs  of  great 
achievement.  In  this  sense,  it  is  an  ideal  to  be  realized 
in  exactly  the  same  manner  as  efficiency  and  conservation. 

In  the  attempt  to  attain  a  condition  of  prosperity,  as 
well  as  in  its  actual  realization,  man  is  often  exposed  to 
certain  grave  dangers.  Just  as  a  false  efficiency 
may  be  secured  at  the  expense  of  the  worker,  so 
an  unbalanced  prosperity  may  be  attained  at  the  cost  of 
individual  well-being.  Prosperity  may  be  confined  to  the 
few,  while  poverty  engulfs  the  many.  Furthermore, 
when  this  prosperity  is  once  attained  it  may  be  made  to 
serve  wrong  purposes ;  it  may  even  result  in  moral  degenera- 
tion. In  great  moral  crises,  a  nation  must  never  think 
simply  in  terms  of  material  wealth.  A  prosperous  nation 
must  be  a  nation  of  strong  moral  fiber,  willing  to  undergo 
temporary  sacrifices  for  the  sake  of  abiding  principles. 

Prosperity,  therefore,  should  not  be  regarded  as  an  end 
in  itself ;  it  is  merely  an  instrument  for  the  betterment 
of  the  human  race.  Hence,  it  is  important  to  its  twofold 
distinguish  between  national  prosperity  and  character- 
individual  prosperity.  The  true  material  happiness  of  a 
people  depends  upon  individual  prosperity.  It  is  not 
sufficient  that  a  nation's  exports  increase  in  volume,  and 
that  its  competitors  be  driven  from  foreign  markets.  The 
wealth  of  the  nation  must  be  absorbed  by  the  masses 
themselves  up  to  the  point  necessary  for  their  material 
comfort.  First  of  all,  therefore,  we  shall  discuss  the  basis 
of  national  prosperity,  because  from  it  should  naturally 
flow  individual  prosperity. 


3<d  American  Economic  Life 

National  Prosperity.  —  The  meaning  of  national  pros- 
perity may  be  more  clearly  grasped  by  a  contrast  between 
china  and  Cnina  and  tne  United  States.  The  first  is  a 
United  land  of  wants ;  the  second,  a  land  of  plenty :  the 

one  is  a  nation  of  deficit;  the  other,  a  nation 
of  surplus.  Here  are  two  countries  —  China  and  the 
United  States  —  equally  endowed  by  nature  and  yet 
differentiated  by  the  extremes  of  poverty  and  prosperity. 
What  has  brought  about  this  wide  divergence?  Why  has 
one  nation  been  denied,  and  why  has  the  other  almost 
attained,  the  goal  of  welfare?  To  solve  this  problem,  we 
shall  examine  briefly  these  two  countries  from  the  stand- 
point of  their  population,  their  natural  resources,  their 
industrial  development,  and  their  ideas  and  beliefs. 

In  China  there  are  four  hundred  million  people,  or  almost 

four  times  as  many  as  there  are  in  the  United  States.     If  the 

whole  population  of  the  United  States  and  forty 

Population  .,,.  .  \ 

millions  more  were  to  move  into  the  State  of 
Texas,  they  would  be  about  as  close  together  as  are  the 
people  in  the  Yang-tse-kiang  Valley  of  China.  It  would 
not  be  right,  therefore,  to  charge  China's  lack  of  prosperity 
to  a  scarcity  of  labor. 

The  Chinese  belong  to  the  Mongolian  race.  They  are 
physically  smaller  than  the  Caucasians  of  our  own  land; 
but  the  experience  of  the  last  fifty  years  in  the 
development  of  Japan,  whose  people  are  ad- 
mittedly not  above  the  Chinese  in  capacity,  has  shown 
that  intellectually  the  Mongolians  are  at  least  the  equals, 
if  not  the  superiors,  of  Western  races.  Within  a  genera- 
tion the  Japanese  acquired  a  knowledge  of  industry  and 
science  that  the  Western  races  labored  two  hundred  years 
to  develop.     In  the   Russo-Japanese  war,   the  Japanese 


Prosperity  31 

loss  through  disease  was  almost  nothing;  while  among 
the  Russian  troops  in  that  war,  the  American  troops  in 
the  Spanish- American  War,  and  the  British  troops  in  the 
Boer  War,  the  death  roll  from  disease  was  appalling.  This 
is  only  one  instance  in  which  the  Japanese  have  bettered 
their  instruction  and  thereby  proved  the  inherent  capacity 
of  the  Mongolian  race. 

China  possesses  natural  wealth  equal,  if  not  superior, 
to  that  of  any  like  area  in  the  world.  The  country  is 
magnificently  watered.  The  Yang-tse-kiang,  Natural 
three  thousand  miles  long,  is  navigable  to  ocean-  resources- 
going  vessels  for  eleven  hundred  miles.  The  Hoang-ho, 
two  thousand  six  hundred  miles  long,  is  connected  with 
the  Yang-tse-kiang  by  the  Imperial  Canal;  and  these 
two  rivers  and  the  canal  form  one  of  the  finest  water  systems 
in  existence.  The  climate  of  China  is  very  similar  to  that 
of  the  United  States.  Minerals  exist  in  abundance.  It 
is  believed  that  the  bituminous  and  anthracite  coal  fields 
of  China  contain  as  much  coal  as  those  of  all  the  other 
countries  of  the  world  combined.  China's  poverty,  there- 
fore, cannot  be  attributed  to  a  lack  of  natural  resources. 

In  Chinese  manufacturing,  machinery  has  not  generally 
replaced  human  energy ;  consequently  only  those  things 
which  will  sell  at  a  high  price,  —  such  as  silks  industrial 
and  fabrics  of  various  kinds,  —  are  generally  devel°Pment- 
made.  In  spite  of  the  fact  that  the  people  are  apparently 
so  naturally  capable  and  numerous,  and  the  natural  re- 
sources so  abundant,  the  industries  of  China  are  practically 
undeveloped.  Despite  its  native  abundance,  iron  is  im- 
ported, although  proper  methods  could  produce  iron  in 
China  as  cheaply  as  in  any  other  place  in  the  world.  Coal 
is  mined  in  very  limited  quantities  and  by  the  use  of  appli- 


32  American  Economic  Life 

ances  so  costly  and  inadequate  that  only  the  rich  can 
afford  to  buy  it.  In  her  industrial  development,  there- 
fore, China  is  immeasurably  inferior  to  the  United  States. 

Chinese  transportation  facilities,  except  on  the  water- 
ways, are  so  inadequate  that  a  bulky  commodity,  like  coal, 
Transpor-  cannot  De  shipped  for  any  distance  before  its 
tation  price  has  become  prohibitive  to  all  except  the 

very  wealthy.  This  constitutes  an  important 
factor  in  China's  poverty.  For  here  is  a  land  full  of  cap- 
able people,  abounding  in  natural  resources,  but  without 
industry  and  transportation,  and  therefore  in  constant 
danger  of  want.  Crop  failure  in  a  district  remote  from 
water  transportation  means  starvation.  There  are  few  rail- 
roads ;  the  roads  are  bad.  People  suffer  from  hunger  within 
a  few  hundred  miles  of  an  abundant  supply  of  food,  because 
there  are  no  means  of  transporting  bulky  commodities. 

It  is,   therefore,   true  that  the  backward  condition  of 

China  is  due  to  a  lack  of  organized  industry;    but  the 

absence  of  this  industry  itself  is  due,  in  large 

Tradition.  «  ».     ,  -  .         ,  „  ,, 

measure,  to  a  blind  worship  of  custom.  My 
father  used  this  tool  "  is  a  conclusive  argument  in  the  ears 
of  the  son,  and  he  uses  the  same  tool  without  question. 
The  people  of  the  United  States,  however,  have  always 
developed  industry  irrespective  of  tradition,  because  they 
know  that  only  through  the  breaking  of  tradition  can 
progress  sometimes  be  made. 

Because  of  the  powerful  influence  of  custom  and  tradi- 
tion upon  the  Chinese  people,  national  progress  and  pros- 
_    .   ,  perity  have  not  been  attained.     In  the  United 

Control  over     *  " 

environ-         States  exactly  the  opposite  condition  prevails. 

By  discarding  tradition,   the  American  people 

have  developed  their  resources  and  controlled  their  en- 


Prosperity  33 

vironment;  the  Chinese  have  not.  Instead  of  letting 
nature  dominate  them,  the  people  of  the  United  States 
have  learned,  in  a  large  measure,  to  dominate  nature. 
If  the  Mississippi  overflows  its  banks,  as  it  sometimes 
does,  the  people  are  not  drowned  by  the  tens  of  thousands, 
because,  long  before  the  break  occurs  or  the  water  reaches 
a  town,  the  news  of  the  coming  flood  has  been  sent  over 
telegraph  wires  and  the  people  are  prepared  to  meet  it, 
or  else  have  left  for  places  of  safety.  As  a  rule,  however, 
the  Mississippi  is  not  allowed  to  overflow  its  banks,  al- 
though it  is  in  somewhat  the  same  position  as  the 
Hoang-ho,  flowing  in  a  channel  which  in  many  places  is 
above  the  level  of  the  surrounding  country. 

The  control  of  Americans  over  their  environment  may 
be  seen  in  another  direction.  The  Chinese  depend  upon 
one  crop  —  rice.  If  the  rice  crop  fails,  the  Chinese  starve. 
The  people  of  the  United  States,  however,  do  not  depend 
upon  one  crop.  A  great  part  of  their  food  is  derived  from 
wheat ;  but  through  the  development  of  the  milling  industry, 
the  beef  industry,  the  canning  and  preserving  industry, 
and  the  use  of  corn,  it  has  been  possible  to  live  successfully 
through  a  national  crisis  without  being  in  immediate  danger 
from  starvation.  This  was  clearly  demonstrated  during 
the  period  of  the  World  War,  when  so  much  American 
wheat  was  shipped  abroad. 

The  net  result  of  this  power  over  the  physical  environ- 
ment —  this   control   of   natural    resources  —  secured   by 
discarding  age-long  traditions  is  the  creation  in  Surplus 
the  United  States  of  a  vast  quantity  of  surplus  wealth: 
wealth.     Whereas,    throughout    the    centuries,   Meanin&- 
China's  traditional  methods  have  barely  produced  sufficient 
wealth   for   current   consumption,   America's   enlightened 


34  American  Economic  Life 

processes  of  production  have  created,  over  and  above  what 
is  needed  for  present  use,  vast  quantities  of  economic 
goods  for  future  consumption.  That  is,  in  the  United 
States,  all  the  products  of  industry  are  not  consumed  at 
once  —  part  is  set  aside  for  future  needs  or  for  aiding 
future  production.  This  constitutes  surplus  wealth  and 
guarantees  national  prosperity. 

The  development  of  surplus  wealth  is  one  of  the  great 
steps  in  civilization.  America,  as  contrasted  with  China, 
has  vast  masses  of  this  surplus  wealth  stored  up  in 
the  form  of  railroads,  factories,  machine-shops, 
ships,  automobiles,  food  products,  and  canned  goods. 
These  things,  accruing  year  after  year,  serve  to  increase 
the  productive  efficiency  of  the  people  and  to  render  them 
more  capable  of  supplying  themselves  with  the  goods 
they  desire.  Not  only  does  this  surplus,  stored  up  and 
added  to  year  after  year,  guarantee  the  nation  against 
starvation  and  want ;  but,  in  addition,  it  supplies  men  with 
the  comforts  and  pleasures  of  life.  Mechanical  inventions, 
one  form  of  surplus  wealth,  have  enormously  broadened 
man's  possibilities  of  life. 

Individual  Prosperity.  —  Since  the  true  end  of  national 
prosperity  is  individual  prosperity,  national  wealth  is  of 
its  impor-  little  real  value  unless  it  is  distributed  among 
tance.  j-ne    individuals    composing    the    nation.     The 

United  States  is  immensely  wealthy;  great  quantities  of 
additional  wealth  are  produced  each  year ;  and  increas- 
ing capital  enlarges  the  possibilities  of  future  wealth  pro- 
duction. But  it  is  not  enough  to  state  that  the  country 
is  rich-.  What  becomes  of  these  riches  ?  If  a  considerable 
proportion  of  this  wealth  is  concentrated  in  the  hands  of  a 
relatively  small  group  of  people,  the  average  individual 


Prosperity  35 

may  be  no  better  off  than  if  this  vast  surplus  of  wealth 
did  not  exist.     The  nation  must  pass  prosperity  around. 

Charles  Dickens  draws  a  sharp  contrast  between  national 
and  individual  prosperity.  In  "  Hard  Times,"  Mr.  Mc- 
Choakumchild,  the  schoolmaster,  who  is  teaching 

An  example. 

political  economy,  says :  "  Now  this  school- 
room is  a  nation  and  in  this  nation  are  fifty  millions  in 
money.  Girl  number  twenty,  is  not  this  a  prosperous  na- 
tion, and  ain't  you  in  a  thriving  state?  "  And  girl  number 
twenty,  the  daughter  of  a  circus  rider,  replies  that  she 
cannot  say  whether  or  not  it  is  a  prosperous  nation,  and 
whether  or  not  she  is  in  a  prosperous  state  until  she  knows 
who  has  the  wealth  and  whether  any  of  it  is  hers. 

The  United  States  cannot  be  truly  prosperous  and  we  as 
individuals  cannot  be  well  off,  unless  all  of  us  share  in  the 
national  prosperity.  The  real  test  of  prosperity  The 
must  be,  not  national  wealth,  but  individual  conclusion, 
welfare.  The  goal  of  economics  cannot  be  attained  until 
each  individual  in  society  is  consuming  a  sufficient  quantity 
of  goods  to  insure  him  health  and  productive  capacity; 
that  is,  until  his  income  is  sufficient  to  maintain  a  standard 
of  living  consistent  with  good  health  and  efficiency.  There- 
fore, in  order  to  test  the  extent  of  individual  prosperity 
in  the  United  States,  we  shall  now  turn  our  attention,  in 
the  succeeding  chapters,  to  the  problems  of  wealth  con- 
sumption. 

QUESTIONS  FOR  RECITATION 

1.  Compare  China  and  the  United  States  in  regard  to  their 
similarities. 

2.  Contrast  their  differences. 

3.  What  is  the  fundamental  reason  for  the  poverty  of  the  one 
and  the  prosperity  of  the  other? 


36  American  Economic  Life 

4.  Explain  the  dangers  of  national  prosperity. 

5.  What  is  surplus  wealth? 

6.  State  clearly  the  relation  between  surplus  wealth  and  national 
prosperity. 

7.  Give  several  forms  of  surplus  wealth  in  the  United  States. 

8.  What  are  its  good  results?  \ 

9.  How  does  it  originate?    What  is  the  relation  between  thrift 
and  surplus  wealth  ? 

10.   Define  prosperity.     Explain  the  two  kinds  of  prosperity, 
n.   What  does  national  prosperity  primarily  desire  —  wealth  or 
welfare  ? 

12.  Why  is  individual  prosperity  so  important? 

13.  How  may  individual  prosperity  be  attained? 

14.  Why  should  a  nation  desire  prosperity? 


PROBLEMS  FOR  DISCUSSION 

1.  Discuss  the  changes  taking  place  in  China  to-day. 

2.  Show  the  relative  importance  of  man  and  nature  in  creating 
national  prosperity.     Give  illustrations  from  typical  nations. 

3.  Show  the  relation  between  national  adversity  and  the  "one 
crop  system."    Discuss  Ireland  in  this  connection. 

4.  What  accounts  for  the  backwardness  of  the  Mediterranean 
countries  ? 

5.  Discuss  the  effect  of  war  upon  surplus  wealth. 

6.  Discuss  the  effects  of  the  Industrial  Revolution  from  the 
standpoint  of  surplus  wealth. 

7.  Explain  surplus   wealth   in   terms  of  production  and   con- 
sumption. 

8.  Discuss  the  relation  between  individual  prosperity  and  the 
problem  of  the  distribution  of  wealth. 

9.  Why,  for  centuries,  has  China  been  called  a  static  society? 

10.  Are  there  any  advantages  a  static  society  enjoys  over  a  pro- 
gressive society?    If  so,  name  some. 

11.  Is  the  world  to-day  in  a  static  or  a  dynamic  condition  ?    What 
are  the  dangers  as  well  as  the  advantages  of  this  condition  ? 


Prosperity  37 

SUPPLEMENTARY  READING 

Carver,  T.  N.     Principles  of  Political  Economy,  Chap.  VI. 

Ely,  R.  T.    Outlines  of  Economics,  Chaps.  V-VI. 

Patten,  S.  N.     The  New  Basis  of  Civilization,  Chaps.  I  and  II. 

Ross,  E.  A.     The  Changing  Chinese. 

Shaler,  N.  S.     Man  and  Nature  in  America,  Chaps.  V-VIII. 

Smith,  J.  R.     Commerce  and  Industry,  Part  I  and  Chap.  XXXV. 


PART   TWO 
PROBLEMS   OF   CONSUMPTION 

CHAPTER  V 

The  Consumption  of  Wealth 

I.   The  economic  life 
i.   Its  ideal 
2.   How  to  measure  this  ideal : 

a.  Through  the  consumption  of  wealth 
(i)  Its  importance  in  childhood 

(2)  Its  continuous  character 

b.  Through  the  production  of  wealth : 

(1)  Why  production  is  vital 

(2)  The  economic  life  two-sided 

II.   Nature  of  consumption 

1 .  Meaning  of  consumption 

2 .  Kinds  of  consumption : 

a.  Productive  consumption : 
(1)  Meaning 

(2) ,  Examples 

b.  Unproductive  consumption : 

(1)  Meaning 

(2)  Examples 

3.  Effect  on  economic  life 

III.   Importance  of  consumption 

1 .  How  it  varies 

2.  Rules  of  consumption: 

a.  Consumption  should  be  regular 

b.  Consumption  should  be  varied : 

38 


The  Consumption  of  Wealth  39 

(1)  Disadvantages  of  sameness 

(2)  Advantages  of  variety 
c.   Conclusion 

The  Economic  Life.  —  It  must  now  be  clearly  evident 
that  life  has  a  distinctly  economic  background.  Food, 
clothing,  shelter,  and  recreation,  upon  which  life  so  inti- 
mately depends,  are  the  products  of  economic  effort.  All 
life  is  not  economic ;  there  is  more  than  the  economic  in 
life ;  and  yet  all  life  is  dependent  upon  the  economic  for 
its  continuance. 

When,  therefore,  we  speak  of  the  economic  life  we  mean 
that  life  which  strives  for  the  attainment  of  welfare  through 
economic  means.     Welfare  may  be  social  or  indi- 

...  .   .     .  Mil  i  Its  ideal. 

vidual,  and  it  is  possible  that  the  two  may  not 
always  harmonize.  We  have  seen  that  a  country  may  give 
evidence  of  great  national  prosperity,  but  that  this  prosperity 
may  not  be  sufficiently  individualized.  It  is,  however,  just 
this  very  ideal  of  individual  welfare  that  the  economic  life 
is  intended  to  embody.  True  social  welfare  should  be 
thought  of  as  including  the  welfare  of  all  members  of  society. 

There  are,  perhaps,  two  measures  of  this  welfare.     The 
first,  a  measure  in  terms  of  the  consumption  of  wealth, 
conceives  of  welfare  as  resulting  from  the  satis-  How 
faction  of  economic  wants.     The  second,  a  meas-  measured: 
ure  in  terms  of  the  production  of  wealth,  conceives  of  wel- 
fare as  resulting  from  surplus  wealth. 

The  consumption  of  wealth  is  the  using  of  economic 
goods  to  satisfy  human  wants.     Each  child  is  a  consumer. 
For  a  period  ranging  from  ten  to  twenty-five   Throu  . 
years,  the  children  born  into  American  homes  are  consump- 
not  producing  economic  goods  at  all.     During 
this  entire  period  of  youth  they  are  maintained  through 


40  American  Economic  Life 

the  surplus  created  by  the  other  workers  of  the  com- 
munity. Every  adult,  while  preparing  to  produce,  has 
passed  through  this  era  of  consumption.  When  this  con- 
sumption stage  is  prolonged,  when  the  child's  preparation 
for  life  is  very  complete,  when  efficiency  has  been  assured 
by  a  sufficient  supply  of  economic  goods  during  the  forma- 
tive period,  individual  welfare  is  conserved  and  social  wel- 
fare promoted,  because  the  long  period  of  consuming 
without  producing  results  in  more  efficient  production  in 
later  life. 

If  youth  has  been  wisely  spent,  the  years  of  adult  life 
should  show  a  large  surplus  of  production  over  consump- 
tion. This  surplus,  which  the  individual  owes  to  the  com- 
munity for  his  early  years  of  maintenance,  is  used  to  support 
the  children  who,  in  the  next  generation,  devote  many 
years  to  productive  training  and  thus  guarantee  their 
own  efficiency  in  manhood.  For  adults,  also,  the  economic 
life  is  possible  only  so  long  as  an  adequate  supply  of 
consumption  goods  is  provided.  Consumption  provides 
the  basis  for  youth  and  development,  but  it  is  no  less 
essential  to  efficiency  in  adult  life  and  to  comfort  in  old 
age. 

Goods  cannot,  however,  be  consumed  until  they  are 
produced.  Men  cannot  eat  without  working.  Children 
Through  cannot  be  kept  in  school  until  they  are  eighteen, 
production,  consuming  constantly  but  never  producing, 
unless  some  of  the  adult  producers  are  creating  more  wealth 
than  they  themselves  are  consuming.  The  economic 
life  on  its  productive  side,  therefore,  presupposes  that  the 
producing  members  of  the  community  are  producing 
enough,  in  addition  to  the  amount  that  they  actually 
consume,  to  enable  the  immature  members  of  the  com- 


The  Consumption  of  Wealth  41 

munity,  and  those  beyond  the  period  of  active  work,  to 
maintain  themselves.  Differently  expressed,  each  pro- 
ducer must  create  a  surplus  over  the  amount  which  he 
consumes. 

The  economic  life  is  much  more  than  consumption.  It 
is  consumption  plus  production.  While  human  wants 
are  satisfied  directly  through  consumption,  it  is  through 
production  that  consumption  is  made  possible.  There 
is  in  this  concept  of  the  economic  life  no  place  for  idlers. 
Every  normal  adult  man  or  woman  must  be  a  producer 
as  well  as  a  consumer,  because  the  individual  who  accepts 
a  return  where  no  service  has  been  rendered  fails  in  his 
duty  to  society.  Each  member  of  an  economic  society 
must,  therefore,  render  the  community  such  service  as  he 
can  render,  receiving  in  return  from  birth  to  death  at 
least  enough  consumption  goods  to  maintain  life  and  effi- 
ciency. In  this  way  the  ideal  of  the  economic  life  will  be 
approached. 

Nature  of  Consumption.  —  The  consumption  of  wealth 
is  a  far  better  measure  of  welfare  than  the  production  of 
wealth,  because  the  amount  of  consumption  can  Meaning  of 
be  more  effectively  determined  in  the  individual  consump- 
case.     The    student,    therefore,    must    clearly 
grasp  the  meaning  of  consumption.     In  economics,  the 
consumption  of  wealth  means  the  using  of  economic  goods 
to   satisfy  human  wants.    This   using  up   process    may 
extend  over  a  short  or  over  a  long  period  of  time.     Food 
is  consumed  at  once ;    clothing  is  worn  out  gradually ; 
while  houses  are  used  up  over  long  periods  of  time.     In 
other  words,  some  goods  satisfy  wants  immediately  and 
directly,  while  other  goods  serve  their  purposes  gradually 
and  indirectly. 


42  American  Economic  Life 

Consumption  not  only  varies  according  to  its  duration, 
but  it  also  varies  according  to  the  character  of  the  wants 
Kinds  of  ^at  **  satisnes-  That  is,  consumption  may 
consump-  satisfy  desirable  wants,  or  it  may  satisfy  un- 
desirable wants.  Hence,  consumption  is  spoken 
of  as  being  productive  or  unproductive.  The  distinction 
between  the  two  is  not  hard  to  grasp,  for  it  rests  upon  the 
simple  distinction  between  that  which  is  beneficial  and  that 
which  is  harmful  to  production.  From  the  standpoint 
of  welfare,  this  difference  is  easily  discernible. 

Productive  consumption  is  that  consumption  of  goods 
which  is  beneficial  to  the  individual  and  to  society.  When 
Productive  suc^  consumption  takes  place,  the  consumer  be- 
consump-  comes  a  better  producer  either  immediately  or 
eventually.  If  the  wants  that  are  satisfied  are 
those  which  contribute  toward  greater  productive  power 
in  the  individual,  the  consumption  is  productive.  Such 
consumption  makes  the  consumer  a  more  efficient  pro- 
ducer. For  example,  a  good  diet,  proper  clothing,  ade- 
quate housing,  necessary  recreation  and  amusement  are 
all  forms  of  productive  consumption. 

Unproductive  consumption  produces  the  opposite  effect 
on  the  individual.  It  either  does  not  add  to  the  produc- 
Unproduc-  ^ve  caPacrtv  of  the  consumer,  or  it  actually  de- 
toe  con-  creases  his  productive  efficiency.  It  therefore 
decreases  production  negatively  or  positively. 
The  wants  that  are  satisfied  by  such  consumption  are  un- 
necessary or  harmful  to  the  consumer's  power  of  increased 
production.  Their  satisfaction  results  in  extravagance 
or  in  actual  harm.  For  example,  the  wearing  of  jewelry 
and  ostentatious  clothing  is  mere  extravagance,  which 
does  not  add  at  all  to  the  power  of  production.     On  the 


The  Consumption  of  Wealth  43 

other  hand,  over-eating  and  excessive  smoking  are  forms 
of  unproductive  consumption  which  actually  decrease 
the  consumer's  efficiency  and  productive  capacity. 

This    contrast   between   productive    and    unproductive 
consumption  shows  clearly  the  relation  between  consump- 
tion and  welfare.     The  economic  life  cannot  be  Effect  on 
attained  by  those  whose  consumption  follows  un-  economic 
productive  channels.     Only  through  productive 
consumption  can  individual  welfare  be  attained.     In  this 
connection  it  is  well  to  remember  that  the  whole  pro- 
hibition movement  aims  at  the  removal  of  one  great  source 
of  unproductive  consumption.     The  consumption  of  alco- 
holic liquors  was  the  greatest  single  deterrent  to  productive 
efficiency  in  American  life. 

Importance  of  Consumption.  —  Wants  are  thus  satisfied 
through  the  consumption  of  economic  goods.  The  im- 
portance of  consumption,  therefore,  will  depend  How  it 
upon  the  number,  character,  and  variety  of  vanes- 
wants.  In  primitive  times,  when  wants  were  few  and 
simple,  the  consumption  of  the  uncivilized  man  was  limited 
to  his  elementary  wants  for  food,  shelter,  and  clothing. 
With  the  progress  of  civilization,  wants  are  constantly 
increasing;  and  the  problems  of  consumption,  therefore, 
become  correspondingly  complex.  The  increase  in  number 
and  variety  of  wants,  which  has  accompanied  advancing 
civilization,  results  in  greater  and  more  varied  consumption, 
provided  a  system  has  been  established  which  simulta- 
neously increases  production.  The  rules  of  consumption 
should  therefore  play  an  important  part  in  American 
economic  life. 

Society  is  slowly  learning  that  to  receive  the  highest 
benefit  from  the  consumption  of  wealth,  the  individual 


44  American  Economic  Life 

must  consume  regularly.  Primitive  man,  depending  on 
hunting  and  fishing  for  his  livelihood,  starved  one  day  and 
gorged  the  next.  Modern  man,  depending  on  a 
Comump-  well-organized  system  of  industry,  is  fed  and 
Hon  should     clothed  from  day  to  day,  and  does  not  spend  one 

be  regular.  #  J  J  r      ■ 

day  in  misery  and  the  next  in  happiness.  In 
this  way,  by  maintaining  a  constant  rather  than  an  inter- 
mittent supply  of  consumption  goods,  men  are  made  more 
efficient  producers. 

The  first  step  in  progress  was  to  make  certain  a  steady 
supply  of  consumption  goods :   the  next  step  was  to  render 

that  supply  more  varied.  This  idea  of  variety  in 
Hon  should     consumption  may  be  best  seen  by  calling  to  mind 

again  one  point  of  difference  between  China  and 
America.  The  Chinese  have  practically  no  variety  in  their 
consumption  of  food.  Rice  is  their  staple ;  and  their 
dependence  upon  this  single  article  of  food  has  two  distinct 
disadvantages.  In  the  first  place,  workers  get  no  particular 
pleasure  out  of  this  monotonous  diet ;  and,  in  the  second 
place,  the  nation  starves  if  the  rice  crop  fails. 

America,  on  the  other  hand,  is  not  dependent  on  one 
staple.  The  exclusive  diet  of  rice,  or  wheat,  has  been  re- 
placed by  a  varied  diet  of  fresh  meat,  eggs,  butter,  sugar, 
canned  vegetables  and  fruits,  bread  and  bread  products, 
and  fresh,  salt,  and  canned  fish.  This  variety  in  con- 
sumption has  a  double  advantage.  It  means,  first  of  all, 
that  if  one  crop  or  one  source  of  food-supply  fails,  the 
nation  will  not  starve.  It  means,  further,  that  this  varied 
diet  contains  food  elements  which  will  give  the  individual 
more  pleasure  in  his  consumption  and  will  therefore  in- 
crease his  welfare.  Thus  the  American  workman,  whose 
food  consumption  includes  meat,  vegetables,  fish,  sugar, 


The  Consumption  of  Wealth  45 

bread,  butter,  and  the  like,  lives  a  more  enjoyable  life 
and  is  a  far  more  efficient  producer  than  the  Chinese 
laborer  whose  diet  consists  solely  of  rice. 

With  stability  and  variety  in  consumption  comes  the 
basis  for  economic  welfare,  provided  this  stability  and 
variety  exist  throughout  the  various  classes  in  . 

■*  .  Conclusion. 

the  community.     Hence,  in  order  to  determine 
the  extent  of  welfare  in  the  United  States,  it  becomes  im- 
portant to  inquire   what  standards  of  consumption  are 
maintained  generally  throughout  American  society. 

QUESTIONS   FOR  RECITATION 

1.  What  is  the  economic  life?  Would  you  be  an  idler,  if  you 
could? 

2.  What  two  measures  of  welfare  are  there  ?     Explain  each. 

3.  Show  the  relative  importance  in  early  and  later  life : 

a.  Of  consumption. 

b.  Of  production. 

4.  Explain  how  the  economic  life  is  two-sided. 

5.  Define  consumption. 

6.  Show  clearly  the  difference  between  productive  and  unpro- 
ductive consumption. 

7.  Give  five  examples  of  each. 

8.  Are  our  wants  wholly  under  the  control  of  our  reason?  Do 
we  always  desire  those  things  which  are  beneficial?  Can  you  give 
illustrations  from  your  own  life  ? 

9.  Explain  the  effect  of  prohibition  on  the  economic  life. 

10.  Explain  what  you  mean  by  regularity  in  consumption.  Give 
examples  from  primitive  and  modern  man.     Of  what  advantage  is  it  ? 

n.  What  are  the  chief  advantages  secured  by  varying  your  con- 
sumption?    Give  examples. 

PROBLEMS   FOR  DISCUSSION 

1.  Discuss  the  chief  obstacles  which  hinder  the  American  people 
from  living  the  economic  life. 

2.  Judged  by  a  standard  they  would  admit  to  be  morally  sound, 


46  American  Economic  Life 

do  people  actually  expend  their  incomes  so  as  to  receive  maximum 
benefits  ?     Give  illustrations. 

3.  How  varied  is  your  own  diet?  Test  by  keeping  a  schedule 
for  a  day. 

4.  What  advantages  have  nations  whose  consumption  is  varied 
over  nations  whose  consumption  is  unvaried?  Give  examples  from 
the  world  of  to-day. 

5.  Discuss  the  effects  of  varied  consumption  on  production. 

6.  Show  the  benefits  that  have  resulted  from  the  consumption  of 
the  following  goods : 

a.  Tropical  fruits  and  vegetables. 

b.  Breakfast  foods. 

c.  Sugar. 

7.  Suppose  you  had  a  hundred  dollars  to  spend,  would  you  spend 
all  of  it  at  once  ?  What  would  you  buy  ?  Would  you  buy  the  same 
things  at  all  times  and  under  all  circumstances  ? 

8.  Are  you  able  to  satisfy  all  your  wants?  Which  wants  are 
most  intense  ?    Why  ? 

9.  Contrast  the  life  of  the  country  dweller  with  that  of  the  city 
dweller. 

10.   Does  "the  economic  life"  mean  a  parsimonious  or  a  narrow 
life?    Why  not? 

SUPPLEMENTARY  READING 

Carver,  T.  N.    Principles  of  Economics,  Chaps.  XXXVIII-XL. 
Ely,  R.  T.    Outlines  of  Economics,  Chap.  IX. 
Fetter,  F.  A.     Principles  of  Economics,  Chaps.  IV  and  XL. 
Patten,  S.  N.    Dynamic  Economics. 
Patten,  S.  N.     The  Consumption  of  Wealth. 
Seager,  H.  R.    Introduction  to  Economics,  Chap.  IV. 
Urwick,  E.  J.     Luxury  and  Waste  of  Life,  Chap.  III. 
Watkins,  G.  P.    Welfare  as  an  Economic  Quantity,  Chaps.  I-IV. 


CHAPTER  VI 

The  Problem  of  the  Standard  of  Living 

I.   The  standard  of  living 
i.   What  it  means 
2.   What  it  depends  upon : 

a.  The  wants  of  individuals  : 
(i)  Meaning  and  kinds 

(2)  Meaning  of  utilities 

(3)  Law  of  diminishing  utility 

b.  The  cost  of  living 

c.  The  income  of  workers 

II.   Elements  in  a  standard  of  living 

1 .  What  the  elements  are  : 

a.  The  chief  items 

b.  The  minor  expenditures 

2.  How  the  cost  varies : 

a.  In  city  and  country : 

(1)  Rent 

(2)  Food 

(3)  Clothing 

(4)  Fuel 

(5)  Incidentals 

b.  In  different  cities 

c.  The  conclusion 

The  Standard  pf  Living.  —  The  actual  test  of  individual 
welfare  is  found  in  the  standard  of  living  enjoyed  by  all  the 
members  of  the  community.     The  standard  of  what  it 
living   simply  means   the  amount  of  economic  means- 
goods  which  an  individual   consumes.     If   he   consumes 

47 


48  American  Economic  Life 

merely  an  amount  sufficient  to  satisfy  the  bare  necessities  of 
life  in  regard  to  food,  shelter,  and  clothing,  an  individual  is 
said  to  have  a  low  standard  of  living.  If,  in  addition  to 
these  necessaries  of  life,  man  is  able  to  enjoy  its  comforts 
and  luxuries  through  the  consumption  of  various  other  eco- 
nomic goods,  he  is  said  to  have  a  high  standard  of  living. 
The  standard  of  living  varies,  therefore,  with  the  amount 
of  economic  goods  consumed. 

The  consumption  of  these  goods,  which  measures  the 
standard  of  living  enjoyed,  depends  upon  three  factors. 
What  it  ^n  tne  nrst  Place>  an  individual  would  not  COn- 
depends  sume  goods  unless  there  existed  in  him  the  desire 
for  these  goods.  A  man  of  very  limited  wants 
could  never  attain  a  high  standard  of  living.  In  the 
second  place,  assuming  that  the  goods  are  already  pro- 
duced, he  could  not  consume  them  unless  his  income  or 
wage  was  sufficient  to  satisfy  these  wants.  Finally,  the 
actual  amount  of  goods  he  can  purchase  on  a  given  income 
will  depend  upon  the  prices  of  the  commodities  he  desires, 
that  is,  upon  the  cost  of  living.  Hence,  wants,  income,  and 
prices  must  all  be  considered  in  determining  an  individual's 
standard  of  living. 

Wants  vary  with  the  individual ;  so  that  the  supply  of 
economic  goods  which  would  suffice  in  the  case  of  one 
The  wants  individual,  or  family,  would  not  suffice  in  the  case 
ofindi-  of  another.  If  a  man  is  fond  of  good  pictures, 
his  wants  are  extremely  expensive ;  if  he  likes 
books,  they  are  only  less  so ;  but,  if  he  is  satisfied  with 
magazines  and  newspapers,  they  are  cheaply  supplied. 
Likewise,  food  varies  from  individual  to  individual  and 
from  family  to  family ;  as  does  also  the  desire  for  clothing 
and  housing.     A  standard  of  living,  therefore,  depends  sub- 


The  Problem  of  the  Standard  of  Living  49 

jectively  upon  the  number  and  character  of  wants,  which 
become  more  and  more  complex  as  civilization  advances. 

Wants  necessarily  play  a  large  part  in  shaping  American 
economic  life.  A  want  is  a  desire  for  a  "  good  " ;  a  good 
is  an  object  or  commodity  which  can  be  used  in  consump- 
tion. A  want  may  be  either  elementary  or  acquired. 
Elementary  wants  are  natural ;  and  man,  in  a  greater  or 
less  degree,  shares  these  wants  in  common  with  animals. 
Acquired  wants  are  part  of  our  social  heritage ;  that  is, 
they  have  come  down  to  us  as  a  result  of  the  process  of 
civilization.  Among  them  are  included  the  wants  for 
bathtubs,  furniture,  paved  streets,  and  automobiles.  The 
natural  wants  are  desires  for  the  necessaries  of  life;  the 
acquired  wants  are  desires  for  its  comforts  and  luxuries. 

All  economic  wants,  whether  elementary  or  acquired, 
are  satisfied  by  goods.  Each  good  has  the  capacity  to 
satisfy  a  particular  want.  Food  satisfies  hunger ;  drink 
quenches  thirst ;  coal  provides  warmth ;  shelter  furnishes 
protection.  These  qualities  in  economic  goods  which 
satisfy  human  wants  are  called  utilities.  Utility  must  not 
be  confounded  with  usefulness ;  for  it  is  perfectly  possible 
for  a  commodity  to  possess  utility  without  being  useful. 
A  diamond  pin  may  not  be  useful,  but  it  may  satisfy  one's 
desire  for  show.  In  economics,  the  word  utility  signifies 
the  presence  of  some  want-satisfying  quality. 

After  utilities  have  been  created  or  augmented  in  a  good, 
this  good  does  not  possess  the  same  want-satisfying  quality 
under  all  conditions.  As  the  want  becomes  gradually 
satisfied,  its  intensity  diminishes  and  the  utility  of  the  good 
consumed  decreases.  This  variation  in  utility  gives  rise 
to  the  formulation  of  the  law  of  diminishing  utility,  which 
states  that  additional  units  of  a  good  mean  a  decreasing 


50  American  Economic  Life 

utility  in  each  unit  consumed.  Suppose,  for  example, 
that  you  have  been  taking  a  long  tramp  and  are  strolling 
along  a  hot  country  road.  You  are  tired  and  thirsty,  and 
long  for  some  luscious  fruit  to  refresh  you.  The  thought 
of  an  apple  comes  into  your  mind  and  you  feel  an  intense 
want.  If  you  could  get  just  one  apple,  it  would  possess 
very  great  utility  for  you.  As  you  trudge  along  you  find, 
quite  unexpectedly,  that  your  longing  is  about  to  be  satis- 
fied. A  farmer  hails  you,  and,  being  loaded  down  with 
apples,  offers  you  one.  You  thank  him  and  eat  the  apple 
with  extreme  satisfaction.  He  offers  you  another,  and 
still  another,  and  by  this  time  your  want  has  been  almost 
satisfied.  You  have  enjoyed  each  apple,  but  in  a  less  and 
less  degree,  because  every  additional  apple  affords  less  sat- 
isfaction than  the  preceding  one.  Finally,  after  you  have 
eaten  five  or  six  apples,  you  have  no  desire  for  any  more,  — 
so  far  as  you  are  concerned  they  cease  to  possess  utility. 
In  fact,  if  you  were  to  persist  in  consuming  apples,  pain 
and  distress  would  ultimately  result ;  that  is,  to  you,  apples 
which  a  few  moments  before  possessed  utility  would  now 
possess  actual  disutility.  This  fact  of  diminishing  utility 
is  important  because  it  affects  the  determination  of  the 
price  you  are  willing  to  pay  for  the  commodity  you  desire. 
The  price  of  commodities,  or  the  cost  of  living,  is  another 
important  factor  upon  which  a  standard  of  living  depends. 
The  cost  When  prices  are  high,  a  given  income  will  evi- 
of  living.  dently  purchase  less  than  when  prices  are  low. 
In  fact,  when  prices  are  very  high  a  man  receiving  com- 
paratively good  wages  may  not  be  able  to  purchase  as 
many  goods  as  a  man  with  a  smaller  wage  can  buy  at  a 
time  when  prices  are  low.  For  example,  the  man  with  a 
$2000  income,  who  pays  eighty  cents  a  pound  for  butter, 


The  Problem  of  the  Standard  of  Living  51 

is  not  so  well  off  as  the  man  with  a  $1500  income  who  buys 
the  same  butter  for  forty  cents  a  pound.  The  purchasing 
power  of  income  is  therefore  a  very  important  factor  in 
determining  the  standard  of  living. 

Finally,  income  itself  is  of  vital  importance  in  deter- 
mining the  amount  of  economic  goods  that  an  individual 
may  consume.  When  wages  are  extremely  low  The  income 
and  prices  are  normal,  it  is  impossible  to  maintain  °1 workers-. 
a  high  standard  of  living.  So  obvious  is  this,  that  low  wages 
in  this  country  are  almost  synonymous  with  low  standards. 
Labor  organizations,  therefore,  fight  with  all  the  might 
of  their  great  power  to  keep  wages  at  a  high  level,  in  order 
that  the  workers  may  be  able  to  maintain  a  standard  of 
living  high  enough  to  include  not  only  the  necessaries  of 
life,  but  also  the  goods  that  are  needed  to  satisfy  the 
higher  wants  that  men  have  developed. 

Elements  in  a   Standard   of  Living.  —  A  standard  of 
living   to   accomplish  its  purpose  of  securing  individual 
welfare  and  maintaining  efficiency  should  provide  What  the 
for :  (1)  the  necessaries  of  life,  including  housing,   elements 

food,  clothing,  fuel,  light,  and  transportation;        '__ _. 

(2)  recreation  facilities,  including  proper  provision  for 
health  and  hygiene,  amusements,  and  books ;  (3)  voluntary 
subscriptions  for  insurance,  clubs,  trade  unions,  and 
regular  savings ;  and  (4)  unusual  expenditures  for  medi- 
cines and  physicians,  as  well  as  funds  required  for  house- 
hold furniture  and  incidentals. 

Almost  all  the  expenditures  of  a  workingman's  family 
are  made  for  the  necessaries  of  life,  of  which  housing  and 
food  are  by  far  the  most  important  in  a  modern   The  chiej 
city.     The  investigations  that  have  been  made  items- 
into  this  subject  have  been  based  upon  the  normal  family 


52  American  Economic  Life 

of  five  persons,  including  the  father,  mother,  and  three 
children  under  fourteen  years  of  age.  The  families  and 
wages  considered  are  those  of  workingmen.  It  has  been 
found  that  such  a  family  spends  from  eighteen  to  twenty- 
five  per  cent  of  its  income  for  rent,  the  percentage  varying 
according  to  the  income  received.  It  has  also  been  shown 
that  the  largest  single  factor  in  the  family  budget  is  food, 
the  expenditure  for  which  amounts  to  from  forty  to  forty- 
five  per  cent  of  the  income  of  workingmen's  families. 

Clothing  was  found  to  constitute  a  relatively  small  item 
in  the  budget  of  a  city  workingman's  family,  the  amount 
The  mino  sPent  for  such  purpose  averaging  only  about 
expendi-  thirteen  per  cent  of  the  income.  The  expendi- 
tures for  fuel  and  light  are  comparatively  small, 
varying  from  four  to  six  per  cent  of  the  family  income ; 
while  the  amount  spent  for  transportation  in  large  cities 
averages  about  two  and  one-half  per  cent  of  the  income. 
Expenditures  for  recreation  vary  considerably.  In  the 
lower  income  groups  they  are  very  small,  but  they  rise 
rapidly  with  the  increase  of  income.  The  same  thing  is 
true  of  the  voluntary  disbursements  and  the  unusual 
expenditures. 

In  this  discussion  of  the  elements  in  a  standard  of  living 

and  of  their  relative  importance  in  the  family  budget,  it 

is  important  to  remember  that  only  city  condi- 

cost  varies :    tions  and  workingmen's  families  have  been  here 

in  city  and    investigated.     To  estimate  the  relative  expendi- 

country.  .  ..,,.. 

tures  for  these  different  items  for  a  family  living 
in  the  country,  it  is  necessary  to  take  into  consideration 
the  difference  between  city  and  country  conditions  and 
the  consequent  difference  in  the  cost  of  living  in  city  and 
country.     A  particular  element  in  the  standard  of  living, 


The  Problem  of  the  Standard  of  Living  53 

such  as  clothing,  may  not  possess  the  same  importance  to 
the  country  family  as  to  the  city  dweller.  Furthermore, 
the  cost  of  living  as  a  whole  may  be  considerably  lower  in 
the  country  than  in  the  city ;  so  that,  on  a  given  income,  a 
higher  plane  of  living  may  be  attained  by  living  in  the 
country  rather  than  in  the  city. 

Take,  for  example,  the  question  of  rent.  For  a  given 
sum,  which  in  the  tenement  district  of  a  great  city  would 
suffice  only  for  one  or  two  rooms,  a  family  may  secure  in 
the  country  a  fairly  comfortable  four-  or  five-room  wooden 
house.  Thus,  in  regard  to  housing,  a  higher  plane  of 
living,  on  a  sum  allotted  to  rent,  may  be  maintained  in 
the  country  than  in  the  city. 

Again,  the  price  of  food,  the  most  important  item  in 
maintaining  a  proper  standard  of  living,  varies  in  city 
and  country.  Although  the  price  of  meat  is  about  the 
same  in  both  places,  vegetables  are  usually  lower  in  the 
country,  the  price  paid  for  them  being  the  equivalent  of 
the  city  price  with  the  cost  of  freight,  the  charge  of  the 
commission  merchant,  and  the  profits  of  the  retailer  de- 
ducted. However,  the  prices  of  canned  goods,  bread,  cakes, 
and  crackers  differ  little  in  city  and  country  districts. 
Things  which  are  produced  in  the  country  are  much  lower 
in  price  there  than  in  the  city;  while  things  which  are 
produced  in  factories  are  about  the  same  price  in  city  and 
country. 

In  the  country  the  item  of  clothing  is  not  so  important 
as  in  the  city.  Perhaps  the  cost  of  clothing  would  not 
vary  so  greatly  in  city  and  country  districts  were  it  not  for 
the  presence  in  the  city  of  rich  people  who  dress  extrav- 
agantly. The  standard  of  dress  which  they  set  becomes 
the  conventional  or  fashionable  standard,  and  it  must  be 


54  American  Economic  Life 

followed  by  all  who  would  be  "  in  style."  The  result  is 
an  expenditure  in  the  city  for  trumpery  and  cheap  finery 
which  is  unknown  in  the  country. 

Another  important  item  in  the  city  is  the  expenditure  for 
fuel ;  but  in  the  country  fuel  is  almost  a  negligible  quantity 
because  wood,  which  is  very  generally  burned,  can  be 
easily  and  inexpensively  secured.  Hence,  the  fuel  supply 
is  much  more  cheaply  provided  in  country  districts  and 
small  towns  than  in  larger  cities  where  coal  is  so  expensive. 

Finally,  the  country  districts  do  not  furnish  so  many 
opportunities  for  spending  money  as  do  the  city  districts. 
There  is  little  carfare  to  pay,  and  the  temptation  to  buy  in 
stores  is  greatly  lessened  by  the  absence  of  display  adver- 
tising in  shop  windows.  Therefore,  less  will  be  spent  in 
the  country  for  incidentals. 

Again,  the  cost  of  living  varies  in  cities  themselves,  and 
individual  items  of  expense  are  much  greater  in  some 
in  dijjerent  cities  than  in  others.  For  example,  a  great 
cities.  metropolitan  city,  like  New  York,  may  require 

a  much  higher  expenditure  for  housing  than  is  made 
necessary  by  living  in  a  smaller  city.  While  one  item  may 
offset  another,  these  differences  must  be  taken  into  account 
when  estimating  the  cost  of  living  in  different  cities,  and 
the  standards  of  living  attainable  in  them  on  a  given 
income.  Furthermore,  it  is  well  to  remember  that  many 
of  the  investigations  concerning  standards  of  living  have 
been  conducted  in  great  metropolitan  cities,  and  that, 
therefore,  it  may  be  necessary  to  revise  our  conclusions 
when  the  results  of  such  investigations  are  applied  to 
smaller  cities. 

From  this  discussion  of  the  standard  of  living  it  will  be 
seen  just  how  difficult  it  is  to  come  to  definite  conclusions 


The  Problem  of  the  Standard  of  Living  55 

regarding  it.  In  forming  our  judgments  we  must  take 
into  account  (1)  the  wants  of  individuals,  which  them- 
selves must  be  differentiated ;  (2)  the  cost  of  liv-  The 
ing,  which  itself  is  found  to  vary  in  different  co^iusion. 
localities,  and  (3)  the  income  of  workers,  which  is  required 
to  purchase  the  goods  needed  for  consumption.  In  order 
to  arrive,  therefore,  at  a  more  definite  conclusion  regarding 
the  actual  standards  of  living  enjoyed  by  American  workers, 
it  is  now  our  purpose  to  inquire  into  the  wage  received, 
and  the  wage  required,  to  maintain  such  a  standard  of  living 
as  will  insure  individual  welfare  and  guarantee  industrial 
efficiency. 

QUESTIONS   FOR  RECITATION 

1.  Define  "standard  of  living." 

2.  What  are  the  effects  of  maintaining  a  reasonably  high  standard 
of  living? 

3.  What  are  the  three  determinants  of  a  standard  of  living? 

4.  Explain  the  meaning  and  kinds  of  wants. 

5.  Show  the  relation  between  wants  and  utilities. 

6.  Explain  the  law  of  diminishing  utility. 

7.  Enumerate  the  four  elements  in  a  standard  of  living. 

8.  Show  the  relative  proportions  of  income  spent  for  food,  shelter, 
and  clothing  among  workingmen's  families  in  industrial  centers. 

9.  What  are  the  minor  expenditures?    How  are  they  relatively 
distributed  ? 

10.  Compare  the  cost  of  living  in  city  and  country  in  regard  to : 

a.  Rent. 

b.  Food. 

c.  Clothing. 

d.  Fuel. 

e.  Incidentals. 

11.  Why  does  the  cost  of  living  vary  in  cities? 


56  American  Economic  Life 


PROBLEMS  FOR  DISCUSSION 

1.  Discuss  the  effects  of  differences  in  cost  of  living  upon  stand- 
ards of  living. 

2.  In  your  opinion,  what  are  the  most  fundamental  reasons  for 
maintaining  a  proper  standard  of  living  in  a  community  ? 

3.  Do  economic  wants  increase  more  quickly  than  the  stand- 
ard of  living  ?     Give  examples. 

4.  What  would  be  the  effect  upon  standards  of  the  poorest  third 
of  our  city  populations  moving  on  to  farms  ?     Discuss  and  illustrate. 

5.  Is  it  possible  in  the  United  States  to  provide  a  uniform  mini- 
mum standard  of  living  for  all  ?     State  your  reasons. 

6.  Discuss  the  ultimate  effect  on  the  individual  of  living  below 
the  normal  standard. 

7.  Why  should  the  community  at  large  be  interested  in  main- 
taining a  reasonably  high  standard  of  living  ? 

8.  What  are  the  forces  most  to  be  relied  upon  to  maintain  a 
proper  standard  of  living? 

9.  Analyze   the   standards  of  living   maintained   in  your  own 
community.     If  they  vary,  explain  the  reasons. 

10.  Of  the  three  factors  determining  the  standard  of  living, 
which  do  you  regard  as  the  most  important  ?    Why  ? 

n.  What  is  meant  by  a  normal,  reasonable,  or  proper  standard 
of  living  ? 

SUPPLEMENTARY  READING 

Carver,  T.  N.     Principles  of  Political  Economy,  Chap.  XLII. 
Chapin,  R.  C.     The  Standard  of  Living  among  Workingmen's  Families 

in  New  York. 
Devine,  E.  T.    Economics,  Chap.  V. 
More,  L.  B.     Wage  Earners'  Budgets. 
Patten,  S.  N.     The  Consumption  of  Wealth. 
Streighthoff,  F.  H.     The  Standard  of  Living  among  the  Industrial 

People  of  America. 


CHAPTER  VII 

The  Problem  of  Income 

I.   Wages  of  workingmen : 
i .   The  problem  stated 

2.  Pre-war  times : 

a.  The  wage  paid 

b.  The  wage  required 

3.  Post-war  times : 

a.  The  wage  paid 

b.  The  wage  required : 

(1)  The  reason 

(2)  The  amounts 

c.  The  conclusion 

II.   Wages  and  prices 

1.  The  relationship 

2.  Money  wages  and  real  wages 

3.  How  prices  affect  wages 

4.  Recent  fluctuations 

5.  When  prices  rise : 

a.  The  sufferers 

b.  The  causes : 

(1)  Increased  supply  of  money 

(2)  Decreased  production 

(3)  Relation  of  supply  and  demand 

(4)  Defects  in  government 

6.  When  prices  fall 

7.  The  conclusion 

Wages   of   Workingmen.  —  In   order   to   maintain   the 
standard  of  living  necessary  for  health  and  efficiency,  the 

57 


58  American  Economic  Life 

worker  must  receive  wages  sufficiently  high  to  purchase 
the  goods  required  for  consumption.  The  problem  now 
The  problem  before  us  is  to  find  out  what  actual  wages  are 
stated.  paid  workingmen;    whether  they  are  sufficient 

to  meet  the  requirements  of  a  proper  standard  of  living ; 
and,  if  not,  to  inquire  what  wages  should  really  be  paid 
them.  To  answer  these  questions  it  will  be  necessary  to 
indicate  the  general  level  of  wages  throughout  the  com- 
munity, to  show  the  effect  of  prices  on  wages,  and  to 
realize  at  the  outset  that  the  statistics  dealing  with  incomes 
are  constantly  changing,  and  that,  therefore,  no  con- 
clusions as  to  relative  poverty  and  prosperity  can  be  valid 
for  long  periods  of  time. 

A  number  of  important  investigations  have  been  made 
by  individuals  and  Government  Bureaus  into  the  wages 
-r>      „  of  laborers  and  the  incomes  of  American  families. 

Pre-war 

times:  The  The  United  States  Bureau  of  Labor  issues  fre- 
?e  at  '  quent  Bulletins  embodying  the  results  of  its 
investigations  into  this  field.  Reports  issued  at  the  close 
of  the  first  decade  of  the  twentieth  century  revealed  some 
interesting  conditions  that  existed  at  that  time  among 
workers  in  industrial  sections  in  the  northeastern  part 
of  the  United  States.  This  survey  reflected  normal 
conditions  that  prevailed  before  the  world  was  plunged 
into  the  war  that  dislocated  its  entire  economic  system. 
The  results  of  these  investigations,  therefore,  may  be  taken 
as  representative  of  typical  conditions  existing  in  certain 
industrial  sections  of  America  before  the  World  War. 
The  statistics  compiled  showed  that,  at  that  time,  half  of 
the  adult  males  working  in  these  sections  of  the  United 
States  received  less  than  $600  per  year ;  that  three- 
quarters  received  less  than  $750  annually ;  and  that  nine- 


The  Problem  of  Income  59 

tenths  earned  less  than  $1000  per  year.  These  figures  were 
approximate  estimates  and  were  not  strictly  accurate 
because  they  did  not  make  allowance  for  unemployment. 

At  the  same  time  that  these  statistics  were  being  com- 
piled, other  investigations  were  being  made  into  the  actual 
income  required  to  maintain  a  reasonable  stand-  The  wage 
ard  of  living  among  industrial  workers.  A  re^uired- 
study  of  the  families  of  workingmen  living  in  Buffalo, 
New  York,  and  Pittsburgh  showed  that  a  normal  family  of 
five  could  maintain  a  proper  standard  of  living  only  on  an 
annual  income  ranging  from  $750  to  $1000,  according  to 
the  locality.  This  amount  was  required  to  provide  the 
necessaries  of  life  for  the  parents,  and  to  furnish  the  children 
with  nourishing  food,  warm  clothing,  decent  housing, 
elementary  education,  and  a  legitimate  amount  of  rec- 
reation. It  was  therefore  evident  that  a  great  discrep- 
ancy existed  between  the  wage  paid  and  the  wage  required 
to  maintain  efficiency.  For,  at  that  time,  according  to 
these  statistics,  three-fourths  of  the  industrial  workers  in 
certain  sections  were  receiving  less  than  the  minimum, 
and  nine-tenths  less  than  the  maximum  income  required 
to  maintain  a  proper  standard  of  living. 

With  the  World  War,  and  thereafter,  came  great  changes 
both  in  the  wage  paid  workers  and  in  the  income  required 
to  maintain  a  normal  standard  of  living.  It  is  Post.war 
safe  to  say  that,  as  a  result  of  the  changes  times:  The 
wrought  by  this  world  cataclysm,  the  wages  of 
many  workers  doubled  and  even  trebled  during  this 
period ;  so  that  those  formerly  receiving  annual  wages  of 
$750  or  $1000  then  received  $1500  or  $2500.  Particularly 
was  this  true  of  the  skilled  and  semi-skilled  laborers,  al- 
though many  unskilled  workers  profited  by  the  general 


60  American  Economic  Life 

increase.  In  the  skilled  trades  it  sometimes  happened 
that  wages  were  not  only  doubled,  but  even  trebled.  The 
income  of  men  receiving  fixed  salaries,  however,  did  not 
rise  correspondingly.  The  rise  in  wages  during  the  war  was 
attested  by  the  income  tax  returns  of  191 7,  which  showed 
that,  in  approximately  seventeen  per  cent  of  the  20,000,000 
American  families,  some  one  individual  reported  an  income 
of  more  than  $1000.  If  we  take  into  account  (1)  the  fact 
that  these  returns  did  not  include  family  incomes  totaling 
$1000  made  up  of  individual  incomes  of  less  than  that 
amount,  and  (2)  the  fact  that  they  did  not  include  the 
rental  value  of  the  home  owned,  and  (3)  the  fact  that  they 
did  not  include  the  incomes  of  those  exempt  from  the  pay- 
ment of  the  tax,  as  well  as  those  who  actually  evaded 
making  income  tax  returns,  it  is  not  at  all  improbable 
that,  instead  of  seventeen  per  cent,  twenty-five  or  thirty 
per  cent  of  American  families  at  that  time  received  incomes 
in  excess  of  $1000.  Thus,  as  contrasted  with  the  pre-war 
conditions,  perhaps  seven-tenths,  not  nine-tenths,  of 
families  in  the  United  States  earned  less  than  $1000 
annually. 

This  general  increase  in  wages  following  the  World  War 
was  necessitated  by  the  higher  income  required  to  maintain 
The  wage  the  standard  of  living  essential  to  individual 
required.  an(j  sociai  welfare.  The  standard  of  living  itself 
had  not  necessarily  advanced,  but  the  income  required  to 
maintain  the  old  standard  had  greatly  risen.  This  fact 
was  clearly  shown  by  various  investigations  of  the  cost 
of  living  in  different  cities  of  the  United  States.  For 
example,  in  Philadelphia,  the  Bureau  of  Municipal  Re- 
search issued  an  exhaustive  report  in  1919  showing  that 
the  normal  workingman's  family,  consisting  of  two  adults 


The  Problem  of  Income  61 

and  three  growing  children,  required  a  minimum  annual 
income  of  approximately  $1800  in  order  to  maintain  the 
standard  of  living  enjoyed  before  the  World  War  on  an 
income  of  $1000.  This  position  was  supported  by  the 
official  index  numbers  of  the  Federal  Bureau  of  Labor 
statistics,  which  gave  the  increase  in  the  cost  of  living  in 
the  shipbuilding  centers  of  the  United  States  during  the 
rive  years  of  the  World  War  as  eighty  per  cent.  In  other 
words,  a  man  receiving  an  annual  income  of  $1000  in  1914 
required  an  income  of  $1800  in  19 19  to  maintain  his  pre- 
war standard.  Statistics  issued  by  the  Federal  Bureau  of 
Labor  in  1920  showed  that  the  average  increase  in  the 
cost  of  living  had  jumped  from  ninety-six  per  cent  at  the 
beginning  of  that  year  to  one  hundred  and  nineteen  per 
cent  toward  the  close  of  that  year. 

The  Philadelphia  report  was  based  upon  a  detailed  study 
of  the  home  budgets  of  two  hundred  and  sixty  typical 
families  living,  for  the  most  part,  in  the  industrial  districts 
of  the  city.  The  annual  expenditures  of  the  average  family 
were  allotted  as  follows:  for  food,  $674;  for  rent,  $300; 
for  clothing,  $346 ;  for  fuel  and  light,  $84 ;  for  trans- 
portation, $35 ;  for  miscellaneous  expenditures,  including 
those  for  cleaning  supplies,  health,  furniture,  dues,  rec- 
reation, and  amusement,  $361.  The  report  did  not  regard 
these  expenditures  as  fixed  or  as  ideal,  but  considered  them 
as  fairly  representative  of  the  amount  needed  for  working- 
men  to  realize  a  reasonable  standard  of  living  in  times  of 
high  prices  and  general  transition.  For  other  cities,  these 
individual  items  and  the  sum  total  of  income  varied  accord- 
ing to  local  conditions.  In  some  cases  the  minimum  set  was 
considerably  lower  than  $1800 ;  while  in  New  York,  in  the 
garment  industry,  the  workers  placed  the  minimum  in- 


62  American  Economic  Life 

come  required  for  a  reasonable  standard  of  living  as  high 
as  $2500. 

This  contrast  between  conditions  prevailing  in  1910  and 
in  1920,  with  regard  to  the  wages  paid  and  the  income 
The  required  to  maintain  individual  and  social  wel- 

condusion.  farej  makes  it  evident  that  no  fixed  figures  can 
be  given  either  for  the  wage  paid,  or  the  wage  required,  for 
the  normal  workingman's  family.  To  predict  what  wages 
and  standards  will  be  in  future  decades,  is  the  task  of  the 
prophet,  not  the  economist.  But,  in  attempting  to  fore- 
cast the  future,  it  is  well  to  bear  in  mind  the  prolonged 
abnormal  situation  following  the  Civil  War,  when  it  re- 
quired more  than  a  decade  to  restore  the  old  equilibrium 
between  wages  and  prices.  However,  the  half  century 
elapsing  between  these  two  great  wars  wrought  vital 
national  changes  which  make  comparisons  difficult.  The 
Federal  Reserve  Act,  for  example,  passed  before  the  out- 
break of  the  World  War,  diminished  the  possibility  of 
panics  in  times  of  crises  by  means  of  its  system  of  regional 
banks,  which  displaces  the  old  centralized  control  of 
finances.  War's  aftermath,  however,  is  usually  the  same ; 
underproduction,  overconsumption,  speculation,  inflation, 
debt,  and  depression.  In  the  end,  the  bubble  of  exorbitant 
prices  bursts  and  production  once  more  becomes  normal. 
When  the  supply  of  goods  is  adjusted  to  the  demand, 
prices  decline  and  wages  fall.  If  this  transitional  period 
is  a  gradual  one,  the  necessary  adjustments  may  be  made 
without  panics  and  industrial  crises.  If  men  do  not  work 
and  save,  however,  no  critical  economic  period  can  be 
successfully  passed. 

Wages  and  Prices.  —  This  discussion  of  wages  brings 
out  the  intimate  relation  that  exists  between  wages  and 


The  Problem  of  Income  63 

prices.  A  study  of  wages  of  itself  would  tell  little  of  the 
condition  of  the  worker.  A  study  of  prices  alone  would 
be  equally  ineffective.  The  two  together  con-  Thereia- 
stitute  complementary  sides  of  the  same  ques-  ^o11811^- 
tion.  Wages  are  not  an  end  in  themselves;  they  are 
merely  a  means  to  the  consumption  of  goods.  The  really 
important  point  is  not  how  many  dollars  a  man  receives, 
but  how  many  goods  he  can  buy  with  these  dollars ;  and 
this  in  turn  is  determined  by  the  prices  of  the  goods. 

In  this  manner,  the  purchasing  power  of  wages  is  the 
real   determinant  of  a  standard   of   living.     Hence  it  is 
highly  important  to  bear  in  mind  the  distinction  Mo 
between  money  wages  and  real  wages.     Money  wages  and 
wages  are  wages  actually  paid  in  dollars  and 
cents;    while  real  wages  represent  the  purchasing  power 
of  that  money.     The  problem  of  income,  therefore,  centers 
about  real  wages,   for  it  is   that  which  determines  the 
worker's  standard  of  living.     Not  money  wages,  but  the 
goods  which  the   money  will  buy,  is  the  factor  of  vital 
importance  in  our  study  of  workingmen's  incomes. 

In  that  study  the  effect  of  prices  on  wages  has  already 
been  indicated.  This  effect  was  made  evident  to  all  by  the 
course   of   the   World   War.     But   before   that  „ 

How  prices 

event,  it  had  been  frequently  overlooked ;  affect 
especially  by  the  immigrant  to  this  country,  wages 
who  was  attracted  by  the  lure  of  what  appeared  to  be  high 
wages.  As  compared  with  what  the  immigrant  received 
in  his  native  country,  the  wage  he  received  here  was  two 
or  three  times  as  great.  This  difference  in  wages  strongly 
appealed  to  him ;  but  when  once  here  he  found  that  prices 
had  advanced  in  an  equal,  if  not  a  greater,  proportion. 
Thus  it  was  quite  possible  for  his  real  wages  to  be  less  in 


64  American  Economic  Life 

his  new  home  than  in  his  old.  To  offset  this,  he  fre- 
quently maintained  an  exceedingly  low  standard  of  living. 
On  the  other  hand,  when,  after  the  World  War,  prices 
advanced  and  production  declined  abroad  in  a  greater 
ratio  than  wages  advanced,  the  immigrant  again  cast 
longing  eyes  to  America  where  the  rise  in  prices  and  wages 
had  been  more  proportional. 

Fluctuations  usually  occur  in  both  wages  and  prices. 
The  United  States  Labor  Bureau  frequently  publishes 
Recent  bulletins  contrasting  the  wages  of  labor  with  the 

fluctua-  cost  of  living.  A  study  of  these  bulletins  shows 
that  since  1890  there  has  been  a  very  great 
change  in  both  wages  and  prices.  Both  fell  heavily  dur- 
ing the  financial  depression  of  1893-94,  and  then  both 
rose  regularly  until  1907,  when  there  was  another  sharp 
decline.  This  was  followed  by  a  slight  rise  in  both  until 
1 914,  when  there  began  the  tremendous  rise  which  con- 
tinued throughout  the  World  War,  when  a  downward  re- 
action again  set  in. 

The  question  of  whether,  in  these  fluctuations,  prices 
have  risen  more  than  wages,  or  wages  more  than  prices, 

When  rices  *s  a  v*ta*  one'  ^  may  not  ^e  PossuC>le  to  deter- 
rise:  The  mine  this  point  with  mathematical  accuracy 
for  all  occupations  and  for  all  classes  of  people. 
But  one  fact  seems  apparent,  —  prices  rise  for  all  who 
consume  the  goods  in  question,  but  wages  rise  propor- 
tionately for  only  a  part  of  the  workers  who  consume  these 
goods.  Hence  there  is  little  doubt  that,  in  these  fluctua- 
tions, the  real  wages  of  many  individuals  do  not  advance, 
but  that  in  many  cases  they  actually  decline.  This  situa- 
tion becomes  particularly  acute  among  those  who  receive 
crystallized  wages,  or  salaries,  ranging  from  less  than  $1000 


The  Problem  of  Income  65 

to  $3000  annually.  The  studies  of  wages  and  the  cost  of 
living  include  the  wages  of  wage-earners  only.  Were 
like  investigations  made  for  the  large  class  of  salaried  em- 
ployees, it  would  probably  be  found  that  while,  in  times 
of  great  economic  changes,  prices  rise  as  much  as  one 
hundred  per  cent,  salaries  may  rise  only  thirty  or  forty 
per  cent. 

What  are  the  causes  of  rises  in  prices?     Many  attempts 
have  been  made  to  answer  this  question,  and  it  is  possible 
here  only  to  indicate  briefly  the  main  factors  to  Causes  of 
be  considered  in  a  discussion  of  this  question,  rise  in 
The    World    War,    more    than    anything    else, 
stimulated  inquiry  in  this  direction  and  brought  to  general 
attention   the   paramount   significance   of   certain   funda- 
mental  economic   principles    at   work   in   American   life. 
These  may  be  summarized  under  the  effects  of   (1)   the 
increased  supply  of  money,  (2)  the  decreased  amount  of 
production,  (3)  the  relation  of  supply  and  demand,  and 
(4)  the  defects  in  government  which  permit  individual  gain 
at  the  expense  of  social  welfare.     In  addition  to  these, 
there  are  many  other  contributing  causes,  the  investigation 
of  which  is  far  beyond  the  scope  of  this  inquiry. 

Prices  may  be  considered  from  two  points  of  view:  (1) 
from  the  value  of  money  on  the  one  side,  and  (2)  from  the 
value  of  goods  on  the  other.  Prices,  therefore,  may  rise 
because  gold,  which  represents  money,  has  decreased  in 
value ;  or  because  goods,  other  than  gold,  have  increased 
in  value.  When  money  is  more  plentiful,  a  unit  of  it  is 
worth  less  and,  therefore,  a  greater  number  of  units  is 
required  to  make  up  a  given  value.  During  the  period  of 
the  World  War  the  amount  of  money  in  the  United  States 
was   enormously   increased.     This   increase   was   brought 


66  American  Economic  Life 

about  in  two  ways:  (i)  through  the  inflow  of  gold  from 
abroad  to  pay  for  the  huge  quantities  of  food,  munitions, 
and  supplies  exported  to  Europe;  and  (2)  through  the 
issue  of  bonds  and  Federal  Reserve  notes  which  had  the 
effect  of  currency  inflation.  Through  inflation,  therefore, 
the  value  of  money  was  decreased,  and  prices  accordingly 
rose ;  that  is,  it  required  more  dollars  to  purchase  a  given 
quantity  of  goods. 

Prices  may  also  rise  because  goods  have  increased  in 
value.  Just  as  there  may  be  an  over-supply  of  gold,  so 
there  may  be  a  shortage  of  goods ;  and,  when  both  these 
circumstances  occur  at  once,  the  effect  is  twofold.  During 
the  World  War,  vast  quantities  of  goods  were  sent  abroad, 
while  few  goods  were  being  shipped  to  this  country.  This 
decreased  the  amount  of  goods  left  for  home  consumption. 
At  the  same  time,  two  million  workers  were  withdrawn  from 
production  for  military  purposes ;  so  that  there  resulted 
not  only  a  decreased  production,  but  an  increased  cost  of 
production  due  to  the  scarcity  of  labor.  Thus  it  happened 
that  the  value  of  goods  rose  enormously.  The  war, 
draining  us  of  goods  and  flooding  us  with  money,  caused 
goods  to  rise  in  terms  of  money.  Only  with  increased 
production,  or  with  scarcity  of  money,  is  an  equilibrium 
restored. 

Again,  we  may  look  at  the  problem  from  the  standpoint 
of  the  relation  between  supply  and  demand.  An  increase 
in  demand  tends  to  raise  price,  while  an  increase  in  supply 
tends  to  lower  price.  Since  the  price  of  a  good  is  deter- 
mined by  the  demand  for,  and  the  supply  of,  that  good,  it  is 
an  easy  matter  to  see  the  effect  of  this  relationship  upon 
prices  during  and  right  after  the  World  War.  Goods  were 
in  great  demand,  while  their  supply  was  limited;  hence 


The  Problem  of  Income  67 

prices  were  high.  On  the  other  hand,  gold  was  not  in 
such  great  demand,  and  its  supply  was  relatively  plentiful. 
Hence  the  price  of  gold,  its  value  in  terms  of  goods,  was 
low. 

Aside  from  these  economic  laws,  other  considerations 
may  enter  into  the  determination  of  prices.  Under  the 
conditions  noted  above,  prices  of  goods  are  bound  to  rise 
or  fall;  but,  because  of  inadequate  governmental  regu- 
lation, or  because  of  individual  shortcomings,  it  is  quite 
possible  in  modern  society  for  prices  to  rise  beyond  the 
limit  required  by  economic  laws.  The  mere  statement  of 
this  fact  will  bring  to  mind  the  evils  from  which  society 
suffers.  So  long  as  natural  resources  are  monopolized  by 
individuals  for  private  gain,  so  long  as  men  are  allowed 
unrestrained  to  fix  prices  for  their  own  enrichment, 
and  so  long  as  extravagance  —  not  thrift  —  determines 
man's  consumption,  society  cannot  hope  to  attain  that 
individual  welfare  in  which  normal  prices  play  an  im- 
portant part. 

Prices  fall  with  the  reversal  of  the  conditions  previously 
described.  To  bring  about  the  fall  of  prices  it  is  first 
necessary  to  increase  production.  Goods  must  when 
become  more  plentiful  so  that  their  value  may  Pricesfa11- 
decline.  While  this  process  is  taking  place,  deflation  must 
also  occur.  That  is,  the  value  of  money  must  become 
greater  by  limiting  its  supply.  This  may  be  accomplished 
by  retiring  paper  currency,  and  by  increasing  import  trade. 
When  imports  exceed  exports,  the  amount  of  money  in  a 
country  decreases  through  the  shipment  of  gold  abroad  to 
pay  for  the  unfavorable  balance  of  trade.  In  this  manner 
the  quantity  of  money  decreases,  its  value  rises,  and  prices 
decline.     Of  course,  this  increased  production  of  goods  and 


68  American  Economic  Life 

decreased  supply  of  money  must  be  accompanied  by  a 
decline  in  extravagant  living  and  by  a  return  to  normal 
habits  of  work. 

With  this  chapter  we  close  the  discussion  of  the  problems 

connected   with   the   consumption  of   wealth.     Whatever 

may  be  the  ultimate  conclusion  regarding  the 

Conclusion.  .  . 

amount  of  wages  required  to  meet  the  varying 
cost  of  living,  the  fact  still  remains  that  it  is  society's 
duty  to  see  that  a  sufficient  income  be  provided  the  worker 
to  maintain  a  reasonable  standard  of  living.  Families  — 
men,  women,  and  children  —  require  a  certain  minimum 
of  the  necessities  of  life.  Such  a  minimum,  whatever  it 
may  cost,  should,  in  the  interest  of  welfare  and  efficiency, 
be  assured  every  member  of  the  community.  In  the 
United  States,  our  study  of  wages  shows  that  individual 
prosperity,  through  the  distribution  of  social  income,  is 
much  nearer  realization  than  in  the  older  European  civili- 
zations. 

QUESTIONS  FOR  RECITATION 

i.  Compare  the  wages  of  workingmen  now  with  the  wages  paid 
them  before  the  World  War. 

2.  Compare  present-day  wages  with  the  wage  received  after  the 
World  War. 

3.  Compare  workingmen's  wages  just  before  and  just  after  the 
World  War. 

4.  What  accounts  for  these  fluctuations  in  wages? 

5.  Is  the  wage  paid  usually  equal  to  the  amount  required  to 
maintain  a  normal  standard  of  living?     Prove  your  position. 

6.  What  constitutes  a  "normal  family"?  What  amounts  are 
required  to-day  to  maintain  them  in  health  and  efficiency?  Do 
they  receive  the  sum  total  required? 

7.  Explain  the  difference  between  money  wages  and  real  wages. 

8.  How  do  prices  affect  wages  ? 


The  Problem  of  Income  69 

9.  Why  is  the  actual  amount  of  the  money  wage  unimportant  ? 

10.  Explain  the  causes  of  a  rise  in  prices. 

11.  Who  suffer  the  most  when  prices  rise? 

12.  When  do  prices  fall? 

13.  Who  gain  the  most  when  prices  fall? 

PROBLEMS  FOR  DISCUSSION 

1.  Discuss  the  relative  distribution  of  wealth  throughout  the 
United  States. 

2.  Is  it  true  that,  as  America  becomes  wealthier,  the  masses 
become  poorer  ?     Give  reasons  for  your  conclusion. 

3.  Discuss   the   relation   that   should   be   maintained   between 
wages  and  standards. 

4.  When  there  is  a  discrepancy  between  wages  and  standards, 
what  remedial  steps  should  be  taken? 

5.  Do  high  wages  mean  a  high  standard  of  living ?     Why  not? 

6.  When   do   wage   increases   become   necessary?    When   may 
wages  be  lowered  without  lowering  the  standard  of  living? 

7.  Show  what  wages  should  be  to-day  and  what  they  actually 
are. 

8.  Make  up  some  typical  family  budgets. 

9.  Compare  the  fluctuations  in  wages  and  prices  that  occurred 
after  the  Civil  War  With  those  that  occurred  after  the  World  War. 

10.  How  may  an  adjustment  be  effected  between    wages  and 
prices  ? 

11.  Discuss  Engel's  laws  of  expenditure. 

12.  Do  you  believe  in  minimum  wage  laws?    To  what  extent 
may  they  be  employed  ?    What  evils  may  result  from  them  ? 

SUPPLEMENTARY  READING 

Burton,  T.  E.,  and  Seldon,  G.  C.     A  Century  of  Prices. 

Chapin,  R.  C.     The  Standard  of  Living  among  Workingmen's  Families 

in  New  York. 
Commons,  J.  R.    Distribution  of  Wealth,  pp.  252  et  seq. 
King,  W.  I.     The  Wealth  and  Income  of  the  People  of  the  United 

States. 


70  American  Economic  Life 

Parlin,  C.  C.     Basic  Facts  of  Prosperity  in  IQ20. 

Reports  of  Federal  Commission  on  Industrial  Relations,  191 5  to 
date. 

Reports  of  Philadelphia  Bureau  of  Municipal  Research,  1919  to  date. 

Streighthoff,  F.  H.  The  Distribution  of  Incomes,  Columbia  Uni- 
versity Studies,  Vol.  Ill,  No.  2. 

United  States  Bureau  of  Labor  Bulletins. 


PART   THREE 
PROBLEMS   OF  PRODUCTION 

CHAPTER  VIII 

The  Production  of  Wealth 

I.   Nature  of  production 
i .   Meaning  of  production 

2.  Kinds  of  utilities  : 

a.  Natural  utilities 

b.  Form  utilities 

c.  Place  utilities 

d.  Time  utilities 

e.  Possession  utilities 

3.  Factors  of  production : 

a.  What  they  are 

b.  Their  relative  importance 

II.   Part  played  by  natural  resources 

1 .  In  ancient  times 

2.  In  modern  times 

3.  In  India  and  China 

4.  In  the  United  States 

5.  The  conclusion 

Welfare  may  be  measured  not  only  in  terms  of  con- 
sumption, but  also  in  terms  of  wealth  production.  In 
fact,  the  whole  process  of  consumption  is  conditioned 
upon  that  of  production.  It  is,  therefore,  our  purpose 
now  to  inquire  into  the  nature  of  production,  to  analyze 

71 


72  American  Economic  Life 

the  basic  factors  of  production,  and  to  study  the  develop- 
ment of  the  productive  process  in  the  United  States,  in 
order  to  ascertain  how  far  the  production  of  wealth  has 
administered  to  the  welfare  of  the  American  people. 

The  Nature  of  Production.  —  Production  is  the  process 
of  creating  or  of  increasing  utilities  in  goods,  that  is,  of 
Meaning  of  creating  want-satisfying  qualities  in  the  raw 
production,  materials  of  nature  which  supply  the  basis  of  all 
economic  goods.  According  to  the  theory  of  the  inde- 
structibility of  matter,  man  can  neither  create  nor  destroy 
a  single  unit  of  matter.  However,  it  is  perfectly  possible 
for  him  to  change  the  form  of  this  matter,  or  to  otherwise 
alter  its  condition,  so  that  it  will  satisfy  some  definite 
want.  This  process,  taking  place  everywhere  and  at  all 
times,  results  in  the  creation  of  utilities  in  economic  goods. 
Man's  efforts  in  the  field  of  production  consist,  therefore, 
of  all  his  activities  which  lead  to  the  creation  of  utilities 
of  one  kind  or  another. 

In  economics,  the  word  utility  signifies,  as  we  have  seen, 
the  presence  of  some  want-satisfying  quality.  There 
Kinds  of  will,  therefore,  be  as  many  kinds  of  utilities  as 
utilities :  there  are  ways  in  which  goods,  may  satisfy  human 
wants.  Goods  may  satisfy  wants  either  because  of  their 
nature,  or  form,  or  place,  or  time,  or  possession.  Hence 
there  are  five  kinds  of  utilities:  (i)  natural  utilities, 
(2)  form  utilities,  (3)  place  utilities,  (4)  time  utilities, 
and  (5)  possession  utilities. 

Natural  utilities  are  those  existing  in  goods  because  of 
their  inherent  nature.  Coal,  for  example,  though  embedded 
Natural  in  the  vein,  possesses  utility.  To  be  sure,  this 
utilities.  utility  cannot  be  made  available  without  an 
intermediate  process    called  mining;    but  the  coal,   like 


The  Production  of  Wealth  73 

many  other  gifts  of  nature,  possesses  in  itself  the  power  to 
satisfy  human  wants. 

Form  utilities  are  those  created  by  a  change  in  the  form 
or  in  the  inherent  qualities  of  goods.  For  example,  a  chair 
in  the  furniture  factory  possesses  a  greater  want-  Porm 
satisfying  capacity  than  the  boards  in  the  lumber  *&***"> 
yard,  or  the  trees  in  the  forest.  The  clay  in  the  clay  pit 
will  not  satisfy  nearly  so  many  wants  as  the  clay  pressed 
into  bricks,  baked  and  ready  for  building  operations. 
Form  utilities  are  the  creations  of  manufacturing  processes, 
and  we  therefore  usually  think  of  manufactured  goods 
when  we  speak  of  this  kind  of  utility. 

Place  utilities  are  those  created  by  changes  in  the  loca- 
tion of  goods,  whereby  such  goods  are  taken  from  a  place 
where  they  are  not  especially  needed  to  a  place  Piace 
where  they  are  in  great  demand.  Occasionally,  utthHes- 
cotton  in  certain  parts  of  the  South  and  corn  in  certain 
parts  of  the  West  are  of  such  low  utility  that  they  are 
sometimes  burned  for  fuel ;  but  the  transportation  of 
either  commodity  to  Massachusetts  greatly  enhances  its 
want-satisfying  quality.  The  utilities  in  the  goods  have 
been  increased  by  transportation,  because  cotton  or  corn 
will  satisfy  more  wants  in  Boston  than  in  Texas  or 
Kansas.  Transportation  has  created  place  utility  in  these 
goods. 

Time  utilities  are  those  created  by  holding  economic 
goods  from  the  time  when  they  are  not  wanted  till  the 
time  when  they  are  wanted.  Ice,  in  January,  is  Time 
seldom  wanted  and  possesses  little  utility,  but  the  uHhties- 
same  ice  stored  until  July  is  very  much  in  demand,  and 
therefore  possesses  great  utility.  This  increase  in  utility 
due  to  the  lapse  of  time  is  called  time  utility. 


74  American  Economic  Life 

Possession  utilities  are  those  created  through  changes  in 
ownership.  By  an  act  of  exchange,  a  good  may  pass  from 
Possession  the  hands  of  one  who  does  not  greatly  desire  it,  to 
utilities.  another  who  feels  the  need  of  it  intensely.  To 
its  new  owner  it  acquires  additional  utility.  This  kind  of 
utility  is  especially  perceptible  in  acts  of  barter,  whereby 
exchanges  are  made  that  directly  benefit  both  parties. 
The  added  utility  that  comes  through  change  in  ownership 
is  thus  called  possession  utility.  In  modern  life,  real 
estate,  brokers,  for  example,  are  engaged  in  giving  goods 
this  kind  of  utility. 

In  various  ways,  therefore,  man  is  engaged  in  acts  of 
production ;  that  is,  in  increasing  or  creating  utilities  in 
goods  in  order  that  human  wants  may  be  satisfied. 

Production,  which  furnishes  the  material  basis  of  welfare, 

depends    upon    natural    resources,    labor,    and    capital. 

Natural  resources  are  gifts  of  nature,  limited  in 

Factors  of  ...  .         . 

production:    extent;   labor  is  industrial  effort ;    capital  is  an 
What  they      economic   good   used   to   assist   in   production. 

are.  . 

Every  modern  productive  operation  requires 
these  three  factors.  Land  furnishes  the  raw  material; 
labor,  the  effort ;  and  capital,  the  tools  which  are  to  assist 
in  the  act  of  production.  Thus,  specifically,  the  tree  stand- 
ing on  the  hillside  is  a  natural  resource.  A  man  approaches 
the  tree  and  begins  chopping  it  with  an  ax.  The  man  is 
labor;  the  ax  is  capital.  The  felling  of  the  tree,  which 
has  brought  it  one  step  toward  its  final  form  of  chairs, 
let  us  say,  is  one  act  in  an  operation  which  will  enable  the 
wood  to  satisfy  human  wants.  Therefore,  the  entire  opera- 
tion is  an  act  of  production. 

No  modern  productive  act  takes  place  without  these 
three  factors.     To-day,  the  production  of  material  wealth, 


The  Production  of  Wealth  75 

in  whatever  form  imaginable,  has  become  so  highly  or- 
ganized that  it  is  impossible  without  the  participation  of 
land,  labor,  and  capital.  The  necessity  for  the 
participation  of  all  three  factors,  however,  did  relative 
not  originally  exist,  because  nature  and  man  —  %m  or  ance' 
land  and  labor  —  were  the  primary  forces  at  work  in  civili- 
zation. Nor  would  this  necessity  exist  to-day,  if  we 
could  reproduce  primitive  conditions.  A  modern  Robinson 
Crusoe,  with  only  natural  resources  and  his  own  labor  to 
rely  upon,  would  be  obliged  to  create  his  own  capital. 
Capital  is  thus  the  offspring  of  land  and  labor.  It  is  the 
secondary  factor  in  production,  while  land  and  labor  are 
the  primary  requisites  of  production.  However,  this  dis- 
tinction, to-day,  is  of  comparatively  little  importance, 
because  capital  is  just  as  essential  to  modern  production 
as  either  land  or  labor.  In  order  to  realize  to  what  extent 
a  nation  may  attain  economic  greatness,  it  will  be  necessary 
to  examine  carefully  the  part  played  by  each  of  these 
factors  in  production.  First  we  shall  examine  the  part 
played  by  natural  resources. 

The  Part  Played  by  Natural  Resources.  —  Natural  re- 
sources may  not  make  a  civilization,  but  without  them 
civilization  would  be  impossible.  A  study  of  the  in  ancient 
great  civilizations  of  the  past  shows  that,  without  times- 
exception,  the  basis  of  their  greatness  was  an  adequate 
supply  of  natural  resources.  Babylonian,  Egyptian,  Car- 
thaginian, and  Roman  civilizations  were  all  established  in 
fertile  valleys,  or  with  a  nucleus  of  fertile  land.  In  an  age 
when  agricultural  land  was  almost  the  only  resource  avail- 
able, civilizations  were  necessarily  founded  in  fertile  agri- 
cultural districts.  This  truth  was  in  the  mind  of  the 
preacher  who  publicly  gave  thanks  to  Heaven  for  making 


76  American  Economic  Life 

great  rivers  flow  beside  the  big  cities.  Although  his  eco- 
nomics was  defective,  he  was  grasping  at  an  important 
geographical  principle. 

Natural  resources  are  more  important  to-day  than  they 
were  in  any  historic  period,  because  modern  civilization 
in  modem  is  founded  on  mineral  as  well  as  on  agricultural  re- 
times, sources.  What,  then,  are  the  present  resources 
of  the  world?  Where  do  we  find  the  physical  possibilities 
for  the  development  of  great  modern  civilizations?  The 
retarded  development  of  the  African  continent  is  the  out- 
come of  its  vast  desert,  great  heat,  regular  coast  line,  and 
few  navigable  rivers.  South  America  has  its  Amazon 
basin,  but  the  tropical  location  and  dense  vegetable  growth 
prevent  that  region  at  present  from  realizing  its  full  possi- 
bilities; while  the  southern  portions  of  the  continent  are 
too  restricted  in  extent  to  furnish  the  basis  for  an  exten- 
sive civilization.  In  Europe,  where  the  fertile  basin  of  the 
Danube  provides  a  really  adequate  physical  background 
for  this  purpose,  racial  and  political  handicaps  stand  in 
the  way  of  economic  development.  In  a  similar  manner, 
Australia,  while  great  in  extent  and  situation,  is  retarded 
by  a  regular  coast  line  and  the  restrictions  of  vast  stretches 
of  barren  territory. 

There  remain  three  other  regions  abounding  in  natural 
resources,  and  furnishing  a  physical  basis  for  marvelous 
in  India  economic  development.  Two  of  these  are  in 
and  China.  Asia,  and  each  is  the  seat  of  ancient  power  and 
empire.  Both  India  and  China  enjoy  physical  resources 
equal  to  those  of  any  world  power,  although  the  semi- 
tropical  climate  of  the  former  partly  militates  against  its 
success  as  the  home  of  a  dominant  civilization.  These 
regions,  however,  are,  as  we  have  seen,  hide-bound  by  tradi- 


The  Production  of  Wealth  77 

tions  which  stand  in  the  way  of  utilizing  the  vast  resources 
at  the  command  of  the  native  peoples.  Thus,  labor  is 
inefficient  and  capital  is  inadequate  to  develop  the  natural 
resources  which  form  the  basis  of  national  greatness  and 
prosperity. 

The  remaining  and  greatest  of  these  areas  for  world  power 
and  civilization  is  the  United  States.     Here  abound  those 
natural  resources  which  are  at  the  foundation  of  -  the 
production,  and  upon  which  all  civilizations  rest.  United 
Here   also   is  an   abundant   supply   of   capital, 
amassed  by  the  breaking  of  tradition,  and  an  efficient  labor 
force,  independent  and  self-respecting.     The  United  States, 
with  its  Mississippi  Valley,  its  variety  of  climate,  its  agri- 
cultural and  mineral  resources,  its  great  rivers,  and  its 
broken  coast  line,  has  spelled  opportunity  to  millions  of 
civilization-makers,  and  promises  in  the  future  even  greater 
economic  and  spiritual  development. 

So  vital  is  the  part  played  by  natural  resources  in  the 
production  of  wealth  that  industrial  supremacy  is  de- 
pendent upon  their  utilization.  To  attain  eco-  The 
nomic  greatness  a  nation  must  command  the  use  conclusion, 
of  such  resources,  if  it  does  not  actually  possess  them. 
Thus  England  not  only  relies  upon  the  advantages  of 
natural  position  and  the  rich  mineral  deposits  of  her  own 
land,  but  draws  as  well  upon  the  vast  stores  of  natural 
wealth  supplied  by  the  British  Empire.  France  depends 
not  only  upon  her  rich  agricultural  resources,  but  looks 
for  the  full  restoration  of  her  coal  and  iron  deposits.  Ger- 
many, in  her  insatiable  desire  to  secure  dominant  control 
of  land  and  minerals,  warred  upon  civilized  mankind. 
Thus  the  world  witnessed  the  titanic  struggle  for  economic 
supremacy  based  upon  the  control  of  natural  resources. 


78  American  Economic  Life 

On  the  other  hand,  the  failure  to  develop  the  resources  of 
the  land,  when  they  exist  freely  in  nature,  accounts  for 
industrial  backwardness  and  national  retardation.  China's 
failure  in  this  respect  has  already  been  noted.  In  Europe, 
the  neglect  of  Russia  to  develop  adequately  the  vast  re- 
sources of  the  land  accounts  for  her  failure  thus  far  to 
attain  that  commanding  economic  position  which  her 
natural  wealth  justifies.  With  efficient  labor,  with  in- 
creased capital,  and  with  a  highly  organized  productive 
system,  the  twentieth  century  holds  out  untold  possibili- 
ties for  those  civilizations  possessing  adequate  natural 
resources. 

QUESTIONS  FOR  RECITATION 

i.   When  may  production  be  a  measure  of  welfare?    When  is 
it  not  ? 

2.  Define  production.     What  is  the  test  of  a  productive  act  ? 

3.  Define  utility.     How  do  utilities  and  wants  differ? 

4.  Name  and  define  the  five  kinds  of  utilities. 

5.  Give  an  example  of  each  kind  of  utility. 

6.  Tell,  with  your  reason,   (1)  whether  each  of  the  following 
possesses  utility,  and  (2)  wnether  each  is  material  wealth : 

a.  Water. 

b.  Diamonds. 

c.  Sunlight. 

d.  Candy. 

e.  Air. 

/.   Tobacco. 

7.  When  do  goods  reach  the  margin  of  utility?    What  effect 
has  the  point  of  satiety  upon  consumption ;  upon  production  ? 

8.  Name  and  define  the  factors  of  production. 

9.  Explain  the  relative  importance  of  the  factors  of  produc- 
tion. 

10.    Can  there  be  any  modern  productive  act  without  the  partici- 
pation of  all  three  of  these  factors  ?    Prove  your  answer. 


The  Production  of  Wealth  79 

11.  Explain  the  natural  advantages  enjoyed  by  the  United  States 
in  regard  to  the  possibilities  of  wealth  production.  Contrast  her 
position  with  that  of  Germany. 

12.  Explain  the  difference  between  natural  resources  and  economic 
goods  or  wealth. 

13.  Do  natural  resources  possess  utility ?    What  kind? 


PROBLEMS  FOR  DISCUSSION 

1.  Compare  the  relative  parts  played  by  consumption  and  pro- 
duction in  your  own  life.     Give  various  illustrations. 

2.  What  connection  has  the  theory  of  the  indestructibility  of 
matter  with  the  principle  of  production?  Do  these  two  principles 
conflict  ? 

3.  Show  whether  utility  is  synonymous  with  usefulness.  Prove 
your  position  by  giving  examples. 

4.  Show  the  relation  between  the  law  of  diminishing  utility  and 
the  theory  of  price. 

5.  Discuss  the  importance  of  production  to  civilization. 

6.  Show  the  part  played  by  each  factor  of  production  in  the 
making  of :  a.  Hats.  b.  Locomotives.  c.  Bread.  d.  Shoes. 
e.   Books. 

7.  How  were  ancient  civilizations  dependent  upon  natural  re- 
sources ?     Give  examples  from  history.   . 

8.  Why  are  modern  civilizations  still  more  dependent  upon 
natural  resources?     Prove  your  point. 

9.  Are  natural  resources  sufficient  to  guarantee  economic  great- 
ness? What  evidence  is  there  for  your  statement?  Give  illus- 
trations. 

10.  Contrast  the  factors  of  production  with  the  characteristics 
of  material  wealth.     Give  examples  of  your  meaning. 

11.  Discuss  the  difference  between  natural  wealth  and  material 
wealth. 

12.  Account,  on  the  basis  of  natural  resources,  for  the  present 
economic  position  of  the  more  important  European  civilizations. 


80  American  Economic  Life 

SUPPLEMENTARY  READING 

Clay,  H.     Economics,  Chap.  III. 

Ely,  R.  T.     Outlines  of  Economics,  Chap.  VIII. 

Marshall,  A.     Principles  of  Economics,  Book  IV,  Chap.  I. 

Mill,  J.  S.     Principles  of  Political  Economy,  Book  I,  Chap.  I. 

Seager,  H.  R.     Introduction  to  Economics,  Chaps.  VI  and  VII. 

Taussig,  F.  W.     Principles  of  Economics,  Vol.  I,  Chaps.  II-V. 


CHAPTER  IX 

Natural  Resources  of  the  United  States 

I.    Importance  of  land 
i.   What  "land"  means 

2.  How  it  determines  activities 

3.  How  it  aids  man 

II.   How  nature  favors  the  United  States 

1.  In  soil  and  climate 

2.  Importance  of  soil : 

a.  Law  of  diminishing  returns : 

(1)  The  law  stated 

(2)  An  example 

(3)  Effects  of  this  law 

b.  America's  advantage 

III.   Minerals  of  the  United  States 

1 .  Their  importance 

2 .  Kinds  of  minerals  : 

a.  Coal : 

(1)  Supply  and  consumption 

(2)  Kinds  and  uses 

b.  Petroleum  and  gas  : 

(1)  Supply  and  consumption 

(2)  A  future  problem 

c.  Iron  and  copper 

d.  Other  minerals 

e.  The  outlook 

3.  The  conclusion 

Importance  of  Land.  —  In  economics,  the  word  "  land  " 
is  used  synonymously  with  natural  resources.     It  is  taken 

81 


82  American  Economic  Life 

as  typical  of  all  natural  resources  because  it  is  so  representa- 
tive of  nature.  Land  includes  not  only  the  materials  of 
What  nature,  such  as  forests  and  minerals,  but  also 

"  land  "  the  forces  of  nature,  such  as  the  power  of  water- 
falls and  the  fertility  of  the  soil.  Again,  land 
includes  not  only  fields  and  meadows,  but  also  rivers, 
lakes,  bays,  fish,  forest,  wild  game,  mines,  and  wells.  In 
short,  land  includes  all  the  gifts  of  nature,  limited  in  extent, 
which  exist  in  their  present  form  without  the  expenditure 
of  human  labor.  Most  of  this  natural  wealth  is  converted 
by  productive  operations  into  raw  materials  of  industry. 

The  character  of  natural  resources  determines  the  lines 
along  which  people  direct  their  energies.  Could  Columbus, 
How  it  ^or  example>  when  he  first  reached  American 

determines     shores,  have  seen  the  vast  continent  with  all  its 

fl.CtlVltl6S 

latent  possibilities,  he  might  have  predicted 
many  of  the  transformations  which  have  since  taken  place. 
Along  the  barren  New  England  coast  with  its  sharp,  forested 
hills,  thin  soil,  rivers,  creeks,  and  bays,  he  would  have 
observed  the  possibility  of  developing  lumbering,  ship- 
building, fisheries,  commerce,  and  manufactures.  In 
Pennsylvania,  he  would  have  seen  that  the  pioneer  would 
eventually  employ  coal,  iron,  and  oil,  and  from  these  con- 
struct the  new  industry.  Again,  could  he  have  traveled 
over  the  fertile  valleys  of  the  South  with  its  congenial 
climate,  he  would  readily  have  foretold  that  here  was  a 
basis  for  extended  agricultural  development. 

Natural  resources  assist  in  the  development  of  civiliza- 
tion chiefly  in  four  ways :  (i)  soil  and  climate  furnish 
How  it  the  basis  for  agricultural  development ;   (2)  min- 

aidsman.      eraj   resources   furnish   the   basis   of   industry; 
(3)  forests  provide  wood   and   conserve   rainfall;  and  (4) 


Natural  Resources  of  the  United  States  83 

water  resources  furnish  transportation  and  power.  Each 
of  these  will  now  be  discussed  at  some  length  in  this  and  in 
succeeding  chapters. 

How  Nature  Favors  the  United  States.  —  Nature  has 
been  free  in  her  gifts  to  the  United  States,  but  perhaps  no- 
where more  so  than  in  the  wide  range  of  climatic  in  soil  ^ 
and  agricultural  conditions  which  she  has  climate- 
afforded.  The  fertility  of  the  soil  is  remarkable.  The 
land,  stretching  fifteen  hundred  miles  north  and  south, 
makes  possible  a  wide  range  of  climate,  further  diversified 
by  altitudes  ranging  from  sea  level  to  elevations  of  several 
thousand  feet.  The  most  southern  part  is  parallel  with 
the  great  Sahara,  while  the  northern  limits,  exclusive  of 
Alaska,  are  in  the  latitude  of  Germany.  Most  parts  of 
this  vast  area,  about  the  size  of  Europe,  will  support  a 
variety  of  crops.  Even  where  the  amount  of  rainfall 
is  inadequate,  natural  obstacles  may  often  be  overcome  by 
irrigation.  If  varied  climate  is  an  aid  to  varied  agriculture, 
there  is  no  other  section  of  the  world  in  which  a  more 
effective  combination  of  climatic  and  agricultural  possi- 
bilities exists;  for,  it  must  be  remembered,  climate  is  a 
basic  resource  which  cannot  be  destroyed  or  materially 
altered  by  human  wastefulness.  Modern  world  powers 
have  their  homes  in  the  temperate  zone ;  and  it  is  fair 
to  assume  that,  so  long  as  the  present  forms  of  civilization 
prevail,  cold,  invigorating  winters  with  warm,  short  sum- 
mers will  combine  to  produce  the  greatest  vitality  and  the 
most  enduring  energy. 

Soil  itself  is  of  such  fundamental  importance  that  we 
commonly  refer  to  it  as  "  mother  earth."  All  organic  and 
inorganic  forms  of  life  either  spring  from  the  earth,  or 
are  dependent  upon  it  for  existence,  or  are  found  within  its 


84  American  Economic  Life 

bosom.  Soil  is  the  crust  of  the  earth,  its  surface,  and  that 
which  immediately  lies  beneath  the  surface.  Soil  is  thus 
importance  only  a  part  of  the  earth,  but  it  is  that  part  which 
of  soil:  js  0f  greatest  significance  to  civilization.     If  it  is 

fertile,  life  will  flourish;  if  depleted  and  exhausted,  life 
will  be  difficult  and  precarious;  and  if  barren,  life  will 
wither  and  fade  away.  Soil  productivity,  therefore,  is  the 
foundation  of  civilization. 

Since  this  principle  of  fertility  or  productivity  is  at  the 
basis  of  progress  and  prosperity,  it  becomes  important  to 
Law  ,  inquire  whether  there  is  any  economic  law  accord- 

diminishing  ing  to  which  the  soil  yields  its  return.  It  will  be 
found  that  there  is  such  a  law,  and  that  it  applies 
not  only  to  the  surface  of  the  earth,  but  to  the  wealth 
deeply  embedded  within  the  earth  itself.  This  law,  as 
applied  to  the  soil,  shows  that,  after  a  certain  point  has 
been  reached  in  its  cultivation,  land  will  yield  a  smaller 
and  smaller  return  in  proportion  to  the  labor  and  capital 
applied  to  it.  This  law  is  known  as  the  law  of  diminish- 
ing returns  from  land  and  may  be  stated  as  follows :  after 
a  certain  point  has  been  reached  in  the  cultivation  of  a 
given  piece  of  land,  it  will  be  found  that  doubling  the  labor 
and  doubling  the  capital  applied  to  that  land  will  not 
double  the  return  from  it. 

Take,  for  example,  the  case  of  a  typical  farm  in  the  wheat- 
growing  section  of  the  country.  We  know  that  all  pro- 
duction requires  three  factors:  land,  labor,  and  capital. 
Let  us  apply  successive  "  doses  "  of  labor  and  capital 
to  a  unit  of  this  land  and  observe  the  effect  upon  the  wealth 
produced,  that  is,  the  number  of  bushels  of  wheat  which  it 
will  yield.  The  first  unit  of  labor  and  the  first  unit  of 
capital  applied  to  this  unit  of  land  will  yield,  let  us  say, 


Natural  Resources  of  the  United  States  85 

eight  bushels  of  wheat.  Two  laborers  and  an  additional 
unit  of  capital,  in  the  form  of  more  effective  agricultural 
implements,  will  yield  an  additional  twelve  bushels  of  wheat, 
or  twenty  bushels  altogether.  It  will  even  be  found  that, 
if  we  apply  three  units  of  labor  and  three  units  of  capital 
(a  rich  fertilizer  being  added  to  the  capital  already  in- 
vested) to  this  same  land,  it  will  produce  sixteen  additional 
bushels  of  wheat,  or  thirty-six  bushels  in  all.  So  far, 
therefore,  the  results  obtained  from  this  application  of 
labor  and  capital  to  the  land  may  be  represented  by  the 
following  table : 


Land  +  Labor  +  Capital  =  Wheat 


I 

+ 

I 

+ 

$  40 

I 

+ 

2 

+ 

$  80 

I 

+ 

3 

+ 

$120 

8  bushels 

20       " 
36       " 


It  will  be  observed  from  this  table  that  we  have  succeeded, 
first,  in  doubling  the  original  labor  and  capital  and  in  more 
than  doubling  the  original  yield ;  and,  secondly,  in  tripling 
the  original  labor  and  capital  and  in  more  than  tripling 
the  original  yield  from  the  given  unit  of  land.  That  is, 
in  each  case,  the  return  from  the  soil  has  increased  in  greater 
proportion  than  the  increase  in  the  labor  and  capital 
applied  to  it.  But  here  we  reach  the  peak  of  production. 
If  we  apply  another  dose  of  labor  and  another  dose  of 
capital  to  this  land,  its  return  may  increase,  but  not  pro- 
portionately to  the  previous  increasing  returns  from  the 
land.  The  return  may  be  increased  absolutely,  but  not 
relatively.  In  fact,  the  time  will  come  when  it  will  not 
pay  the  farmer  to  attempt  to  produce  more  wheat  from  the 
acreage  under  cultivation.  His  land  will,  therefore,  yield 
a  proportionately  diminishing  return  at  some  point  in 


86  American  Economic  Life 

its  cultivation.     This  decreasing  ratio  may  be  represented 
by  the  following  table  : 


Thus  agriculture  is  subject  to  the  law  of  diminishing 
returns,  the  consequences  of  which  are  far-reaching.  To 
realize  the  full  significance  of  this  law,  it  must  be  remem- 
bered that  it  applies  not  only  to  the  soil,  but  to  mines, 
fisheries,  water  power,  and  other  natural  resources.  When, 
therefore,  a  civilization  begins  to  feel  the  effects  of  its 
operation,  a  decline  in  prosperity  follows,  unless  forces 
counteracting  its  operation  are  discovered.  The  crumbling 
of  ancient  empires  and  the  decline  of  Eastern  and  Mediter- 
ranean civilizations  have  been  accounted  for  on  this  basis. 

But  this  law  has  been  stated  here  chiefly  for  its  historical 
significance,  and  in  order  to  make  us  realize  more  forcibly 
America's  the  tremendous  advantage  enjoyed  by  the 
advantage.  United  States  in  this  respect.  Here  and  there, 
undoubtedly,  one  may  observe  the  operation  of  this  law  in 
America.  For  example,  in  certain  mining  industries  the 
return  has  declined  in  proportion  to  the  labor  and  capital 
applied;  and  in  specific  agricultural  districts,  because  of 
inadequate  soil  conservation,  the  yield  has  decreased  in 
proportion  to  the  labor  and  capital  applied  to  the  soil. 
But  these  are  only  isolated  instances  which,  indeed,  it  is 
most  important  to  bear  in  mind  when  considering  the 
necessity  for  conservation  in  our  national  life.  When, 
however,  we  consider  the  remaining  undeveloped  natural 
resources  of  the  United  States,  its  still  fertile  soil  and  un- 


Natural  Resources  of  the  United  States  87 

touched  mineral  deposits,  we  realize  more  than  ever  the 
advantage  which  this  nation  enjoys,  as  compared  with  the 
civilizations  of  the  Old  World,  in  regard  to  the  operation 
of  the  law  of  diminishing  returns.  Furthermore,  American 
inventive  genius  is  always  struggling  to  counteract  this 
law  wherever  its  operation  is  noticeable. 

Minerals  of  the  United  States.  —  If,  now,  we  look  under 
the  surface  of  the  earth,  we  shall  find  that  nature  has 
equally  endowed  the  United  States  with  rich  Their  im- 
mineral  deposits.  This  kind  of  resource  has  P°rtance- 
always  been  of  value  to  mankind,  but  it  is  only  with  the 
advent  of  modern  industry  that  it  begins  to  assume  its 
greatest  importance.  In  primitive  civilizations,  stone, 
bronze,  iron,  tin,  zinc,  gold,  silver,  and  other  minerals 
were  used  for  ornaments,  for  weapons,  and  for  like  purposes. 
In  advanced  civilizations,  however,  minerals  determine 
largely  the  direction  of  national  progress  and  the  extent  of 
national  prosperity. 

For  convenience  of  discussion,  minerals  may  be  divided 
into  two  groups :   fuels  and  ores.     Of  the  fuels,  coal  is  by 
far  the  most  important.     As  a  factor  in'  pro-  ^nds  of 
moting  prosperity,  it  is  second  to  none  of  the  minerals: 
minerals  in  its  threefold  function  of  providing     oa ' 
heat,  light,  and  power.     One  hundred  years  ago  the  nation 
had  a  supply  of  coal  paralleled  only  by  that  of  China. 
To-day,  however,   some  authorities  tell  us  that,   at  our 
present  rate   of  increase   in   consumption,   the   available 
supply  of  anthracite  coal  may  be  exhausted  in  fifty  years 
and  the  available  beds  of  high-class  bituminous  coal  in 
about  one  hundred   and   twenty-five  years.     In  striking 
contrast  to  this  alarming  prediction,   the  United  States 
Bureau  of  Mines  estimated  in  1920  that  the  supply  of 


SS  American  Economic  Life 

minable  coal  in  the  United  States  amounted  to  3,553,673,- 
100,000  tons,  or  enough  to  last  seven  thousand  years  at 
the  present  rate  of  consumption.  It  is  probable  that  both 
of  these  estimates  are  exaggerated. 

Coal  exists  in  three  forms :  anthracite,  bituminous,  and 
lignite.  Anthracite  coal  contains  the  highest  percentage 
of  carbon  and  is  the  most  valuable  as  fuel.  The  avail- 
able fields  of  anthracite,  located  in  Pennsylvania,  are 
being  gradually  exhausted.  Bituminous  coal,  which  con- 
tains less  carbon  and  is  less  desirable  for  domestic  consump- 
tion, can  be  used  for  almost  all  commercial  purposes. 
Furthermore,  it  exists  in  nearly  all  parts  of  the  country. 
The  third  form  of  coal,  known  as  lignite,  consists  of  vege- 
table matter  which  has  undergone  chemical  change  and  is 
much  less  valuable  commercially.  Vast  fields  of  this 
lignite  have  been  found  in  the  Northwest.  If  its  use  can 
be  made  commercially  profitable,  it  may  be  the  coal  of  the 
future. 

The  other  mineral  fuels,  petroleum  and  natural  gas, 
which  have  been  discovered  in  connection  with  most  of  the 
Petroleum  c°al  fields,  are  being  rapidly  utilized.  Already 
and  gas.  abundant  supplies  in  Pennsylvania  have  been 
depleted.  Ohio,  Indiana,  Illinois,  and  West  Virginia  are 
failing  to  increase  their  supply;  and  the  time  may  soon 
come,  perhaps  within  a  quarter  century,  when  the  better 
forms  of  petroleum  and  natural  gas  in  this  country  will  be 
commercially  unusable  because  of  their  scarcity  and  high 
price.  In  fact,  in  1920,  it  was  estimated  that  only  7,000-, 
000,000  barrels  of  oil  were  remaining  in  the  United  States, 
or  enough  to  last  eighteen  years  at  the  present  rate  of  con- 
sumption. However,  in  the  Southwest,  many  new  forms 
of  petroleum  have  been  discovered  which  may,  with  the 


Natural  Resources  of  the  United  States  89 

advance  of  chemistry,  replace  and  supplement  the  better 
grades  now  in  use. 

This  question  of  the  diminution  of  the  fuel  supply  pre- 
sents a  serious  problem.  When  men  first  lived  in  the 
temperate  zone,  they  depended  upon  wood  and  peat  for 
fuel.  As  civilization  advanced,  coal  and  oil  came  into 
use.  With  the  exhaustion  of  these  fuels,  the  temperate 
dwellers  will  be  face  to  face  with  the  problem  of  keeping 
warm  in  winter.  Without  some  form  of  artificial  heat, 
life  in  the  temperate  zone  is  impossible.  What,  then, 
shall  civilization  do  ?  Furthermore,  since  modern  industry 
is  dependent  upon  power,  mechanically  produced,  the 
future  must  discover  some  substitute  for  the  vanishing 
mineral  fuels.  Though  the  immediate  future  is  by  no 
means  certain,  water  power  may  ultimately  prove  an  ade- 
quate substitute ;  while  solar  and  tidal  energy  are  as  yet 
unknown  quantities. 

Among  the  mineral  ores,  iron  and  copper  are  by  far  the 
most  important,  and  the  apparent  supply  of  these  minerals 
is  far  larger  than  the  available  supply  of  coal.  Iron  an^ 
Originally,  bog  ore  was  taken  from  the  lowlands  c°PPer- 
of  New  Jersey  and  Virginia  and  converted  into  iron  and 
steel  products.  This  bog  ore  industry  was  then  displaced 
by  the  ore  mines  of  Pennsylvania,  which,  in  turn,  have 
been  supplanted  by  the  ore  fields  of  the  Lake  regions.  In 
these  latter  fields,  the  ore  lies  on  the  surface  and  is  fre- 
quently shoveled  by  means  of  steam  power  into  cars,  in 
exactly  the  same  way  that  a  gravel  bank  is  removed. 

Gold,  silver,  tin,  lead,  zinc,  cement,  brick  clay,  and  stone 
are   also   produced    in   considerable    quantities  other 
throughout  the  United  States.     While  less  im-  «*"*. 
portant  than  iron,  they  nevertheless  play  a  leading  part  in 


go  American  Economic  Life 

determining  the  progress  of  an  industrial  civilization. 
Especially  is  this  true  of  cement,  brick  clay,  and  stone,  all 
of  which  are  particularly  valuable  in  structural  operations. 
These  mineral  ores  together  with  the  mineral  fuels  consti- 
tute the  most  exhaustible  form  of  natural  resources.  A 
forest  which  is  burned  away  may  be  replanted 

The  outlook.  r 

and  replaced,  but  each  ton  of  coal  or  iron  which  is 
mined  is  irreplaceable.  It  has  disappeared,  and,  although 
some  substitute  for  it  may  be  found,  the  coal  or  the  iron 
itself  will  never,  at  least  in  historic  times,  be  replaced. 
Too  much  emphasis,  therefore,  cannot  be  laid  upon  the 
necessity  for  conserving  minerals.  When  the  coal  is 
mined,  all  of  the  coal  in  the  mine  should  be  removed.  The 
policy  frequently  followed  of  removing  the  easily  mined 
coal  and  then  permitting  the  mine  to  fall  in,  thus  sealing 
up  millions  of  less  desirable  fuel,  is  disastrous.  Mineral 
resources  are  at  the  basis  of  every  modern  industrial 
society,  and  the  welfare  of  both  industry  and  society 
demands  conservation. 

We  have  seen,  from  this  brief  review  of  our  soil  and 
mineral  resources,  that,  so  far  as  they  are  concerned, 
The  con-  nature  has  amply  endowed  the  United  States 
elusion.  w[fa  the  basis  of  progress  and  prosperity.  Her 
great  extent  of  territory,  her  fertility  of  soil,  her  variety  of 
climate,  her  great  mineral  wealth  still  capable  of  conserva- 
tion, all  lead  us  to  this  conclusion. 

QUESTIONS  FOR  RECITATION 

i.   Define  land.     Give  examples. 

2.  Show  how  land  has  affected  the  division  of  occupations  in  the 
United  States. 

3.  What  are  the  four  chief  ways  in  which  land  aids  man?  Ex- 
plain each. 


Natural  Resources  of  the  United  States  91 

4.  Why  is  climate  so  important  ?     Compare  it  with  other  natural 
resources. 

5.  Explain  the  relation  between  climate  and  efficiency. 

6.  Why  do  we  speak  of  "mother  earth"? 

7.  Explain  the  importance  of  soil. 

8.  Explain  the  law  of  diminishing  returns  from  land,  giving 
examples. 

9.  Is  this  law  in  operation  generally  throughout  the  United 
States?    Defend  your  position. 

10.   Name  the  chief  minerals  of  the  United  States  in  what  you 
regard  as  the  order  of  their  importance. 

n.  What  are  the  minerals  most  essential  to  industry ?    Why? 
.    12.   Show  why  the  conservation  of  minerals  in  the  United  States 
is  absolutely  imperative. 

13.  Explain  the  different  kinds  and  uses  of  coal. 

14.  What  mineral  is  coming  into  greater  prominence  ?    Why  ? 

15.  What  problem  does  the  future  have  in  store  for  us  ?    In  what 
ways  may  it  be  solved  ? 

PROBLEMS  FOR  DISCUSSION 

1.  What  is  meant  by  the  "economic  interpretation  of  history"? 

2.  What  physical  reasons  account  for  the  greatness  of  Holland? 
Of  Japan?  Why  did  the  former  nation  develop  earlier  than  the 
latter? 

3.  When  do  natural  resources  cease  to  be  free  gifts  of  nature  and 
become  economic  goods  ?     Give  examples. 

4.  What  relation  exists  between  the  shape  and  location  of  land 
masses  and  man's  development  ? 

5.  Why  did  civilization  begin  in  semi-tropical  regions  and  then 
move  northward? 

6.  What  other  force,  besides  nature,  is  essential  to  the  develop- 
ment' of  national  life  and  character?  Give  examples  to  show  its 
vital  importance. 

7.  What  are  the  chief  natural  resources  of  the  United  States? 
In  respect  of  what  resources  is  the  United  States  preeminent  ? 

8.  Of  what  use  is  land  to  the  lumberman ?  to  the  manufacturer? 
to  the  shopkeeper?  to  the  traveling  salesman ?  to  the  fisherman  ?  to 
the  aviator? 


92  American  Economic  Life 

g.  Why  are  iron  and  coal  called  the  foundation  stones  of  industry  ? 

10.  Discuss  the  evil  effects  of  the  law  of  diminishing  returns  from 
land.     Show  by  historical  allusions. 

1 1 .  Explain  the  forces  counteracting  this  law. 

12.  Give  specific  instances  of  the  operation  of  this  law  in  the 
United  States. 

13.  Should  we  or  should  we  not  emphasize  this  law  in  our  teach- 
ing of  economics  ?    Why  ? 

SUPPLEMENTARY  READING 

Annals  American  Academy  of  Political  and  Social  Science,  Conser- 
vation of  Natural  Resources. 

Patten,  S.  N.     The  New  Basis  of  Civilization,  Chap.  I. 

Proceedings  of  the  Conference  of  Governors  (1908). 

Reports  of  National  Conservation  Commission. 

Shaler,  N.  S.     Nature  and  Man  in  America. 

Smith,  J.  R.     Commerce  and  Industry,  Chaps.  VII-IX,  XV. 

Van  Hise,  C.  R.  Conservation  of  Natural  Resources  in  the  United 
States. 


CHAPTER  X 

Land  Reclamation 

I.   Reclamation  by  means  of  irrigation 
i .   How  accomplished 

2.  First  projects : 

a.  Work  of  the  Pueblos 

b.  Work  of  the  Mormons 

c.  Operations  in  California 

d.  The  Horace  Greeley  project 

3.  Recent  development : 

a.  Extent  and  value 

b.  The  Act  of  1902  : 

(1)  What  it  provides  for 

(2)  How  expense  is  borne 

(3)  Future  possibilities 

(4)  The  work  undertaken 

4.  Advantages  of  irrigation 

II.   Reclamation  by  means  of  drainage 

1 .  How  carried  on 

2.  The  swamp  lands  : 

a.  Their  extent  and  character 

b.  The  proposed  work 

c.  The  Florida  Everglades 

d.  The  Dismal  Swamp 

e.  Other  swamp  lands 

3.  The  problem  before  us 

Not  only  is  it  possible,  by  increasing  the  efficiency  of 
labor    and   the    productivity  of   capital,    for   progressive 

93 


94  American  Economic  Life 

civilizations  to  delay  the  operation  of  the  law  of  diminishing 
returns,  but  it  is  even  possible,  through  the  application  of 
labor  and  capital,  to  reclaim  for  cultivation  land  which  is 
apparently  useless.  In  other  words,  soil  fertility  may  be 
increased,  not  diminished,  by  scientific  methods  of  con- 
servation. This  reclamation  may  take  the  forms  of  irri- 
gation and  drainage. 

Reclamation  by  Means  of  Irrigation.  —  Irrigation  is 
accomplished  by  the  very  simple  process  of  transferring 
How  accom-  water  from  a  place  where  it  is  not  needed  to  a 
pushed.  place  where  it  is  needed.  Water  is  thus  given 
place  utility.  Practically  any  stream  or  body  of  water, 
which  is  properly  situated,  may  be  utilized  for  irrigating 
arid  land ;  or  the  water  necessary  may  even  be  pumped 
from  artesian  wells.  In  this  manner,  vast  stretches  of 
parched  territory  may  be  brought  under  cultivation. 
Provided,  therefore,  there  is  somewhere  available  an  ade- 
quate supply  of  water  which  may  be  transported  through 
canals,  irrigation  is  always  possible  wherever  there  is  a 
shortage  of  rainfall. 

The  first  irrigation  in  America  was  undertaken  by  the 
Pueblo  Indians  and  the  Cliff  Dwellers  who  lived  in  New 
First  Mexico    and    Arizona.     While    their    methods 

projects:  were  of  the  crudest  nature,  their  work  was  of 
IpZuos  and  sucn  a  substantial  character  that  farmers  still 
Mormons.  use  some  0f  their  irrigation  ditches.  Scientific 
irrigation  replaced  these  cruder  methods  when  the  Mormons 
under  their  great  organizer,  Brigham  Young,  began  their 
conquest  of  the  Utah  desert.  Starting  just  before  the 
middle  of  the  nineteenth  century,  the  irrigation  work  of 
the  Mormons  has  spread  until  it  covers  tracts  in  Utah, 
Wyoming,  Idaho,  and  Arizona. 


Land  Reclamation  95 

A  further  step  in  the  development  of  irrigation  was  made 
during  the  gold  rush  to   California.      The  miners  built 
sluices  to  carry  water  for  their  mining.     Some-  0i)erations 
times,  when  these  sluices  passed  through  fertile  in 
land,  they  were  tapped  either  by  the  miners  or     atf°rma- 
by  the  farmers.     In  this  accidental  way,  the  ultimate  value 
of    irrigation    was    conclusively    demonstrated    and    the 
foundation   laid   for   the  irrigation   systems   which   have 
helped  to  make  California  one  of  the  garden  spots  of  the 
world. 

The  Horace  Greeley  Irrigation  Colony,  named  after  the 
man  who  was  most  interested  in  promoting  it,  was  started 
in  1870  in  Greeley,  Colorado,  and  furnished  the   Horace 

.  .  Greeley 

nucleus  of  the  irrigation  "  boom  "  of  the  eighties,  project. 
During  this  boom  hundreds  of  miles  of  canals  were  con- 
structed at  a  cost  of  millions  of  dollars. 

Since  1870  the  growth  of  irrigation  in  the  West  has  been 
rapid.  In  that  year  there  were  20,000  acres  irrigated  ;  in 
1880   the  number  of    acres   had   increased   to  _ 

Recent 

1,500,000;  in  1890,  to  3,631,000;    and  in  1900,  growth: 
to  7,539,000.     Of  this  irrigated  land,  eighty  per  Extent  and 
cent  was  devoted  to  the  raising  of  crops  and 
twenty  per  cent  to  pasture  land.     While  the  total  cost  of 
providing  the  irrigation  for  this  seven  and  a  half  million 
acres  was  $67,770,000,  the  value  of  the  crops  in  1900  was 
$86,860,000,  or  a  return  in  one  year  of  about  twenty-five 
per  cent  more  than  the  total  cost  of  irrigation. 

The  greatest  real  gains,  however,  have  been  made  since 
the  passage  of  the  National  Reclamation  Act  of  1902, 
which  provides  for  the  construction  of  irrigation 

F  Act  of  IQ02. 

works  under  the  direction  of  the  Secretary  of 

the  Interior.     Such  works  are  to  conform  to  state  laws  and 


96  American  Economic  Life 

to  be  developed  in  accordance  with  local  conditions.  In 
order  to  prevent  the  concentration  of  ownership  of  irrigated 
lands  in  the  hands  of  a  few  individuals,  holdings  under  the 
Act  are  limited  to  160  acres  for  any  one  person. 

Under  this  Act  of  1902  the  expense  of  the  construction 
and  improvement  of  an  irrigation  system  must  be  met  from 
the  sale  of  public  land.  In  this  way  the  work  was  started. 
The  settlers  who  take  up  irrigated  lands  are  required  to 
pay  to  the  government,  in  ten  equal  yearly  installments, 
the  cost  of  irrigation ;  so  that  at  the  end  of  ten  years  the 
government  has  returned  to  it  an  amount  of  money  equal 
to  the  amount  spent  the  previous  decade  on  the  irrigation 
system.  In  order  to  insure  a  democratic  method  of 
administration,  the  irrigation  plant  is  turned  over  to  the 
community  as  soon  as  it  has  been  paid  for.  Thus  the 
responsibility  for  the  successful  management  of  the  system 
rests  on  the  local  community  rather  than  on  the  authorities 
at  Washington. 

In  the  aggregate,  the  seven  and  a  half  million  acres  of 
irrigated  land  sounds  like  a  great  amount ;  but,  when 
compared  with  the  possibilities  of  developing  systems  of 
irrigation,  it  is  only  a  small  beginning.  There  are  approxi- 
mately seventy  million  acres  of  arid  or  nearly  arid  land 
which  may  still  be  irrigated.  The  work  already  done, 
therefore,  covers  a  little  over  one-ninth  of  the  irrigable 
land  of  the  country. 

Since  the  passage  of  the  National  Reclamation  Act  of 
1902,  the  government  has  undertaken  the  construction  of 
irrigation  projects  which  will  irrigate  about  five  million 
acres  of  land,  or  an  area  equal  to  the  present  total  acreage 
of  crops  in  Connecticut,  Massachusetts,  New  Hampshire, 
and  Florida. 


Land  Reclamation  97 

The  advantages  of  irrigation  are  best  seen  by  a  com- 
parison of  the  conditions  under  which  farmers  in  the  East 
and  in  the  West  are  obliged  to  work.     An  Eastern   4J 

0  Advantages 

man,  who  recently  visited  some  of  the  Western  of 
irrigated  lands,  was  asked  on  his  return  what  urngatl0n- 
he  thought  of  the  Eastern  agriculture  as  compared  with 
that  of  the  West.  "  Oh,"  said  he,  "  it  is  a  poor  substitute 
for  irrigation."  Continuous  sunshine  and  a  sufficient  water 
supply,  furnished  when  wanted  and  in  exactly  the  right 
quantities,  form  a  sharp  contrast  to  the  fickle  climate  of 
the  East. 

Reclamation  by  Means  of  Drainage.  —  The  reclamation 
of  land  by  drainage,  which  constitutes  a  main  feature  of 
the  Act  of  1902,  is  in  no  sense  less  important  How  car- 
than  the  work  of  irrigation.  The  eight  million  ned  on- 
acres  of  land  which  have  been  drained  up  to  the  present 
time  have  been  reclaimed  chiefly  through  private  State 
initiative.  The  national  government  has  done  practically 
nothing  in  this  direction. 

In  the  United  States  there  are  over  sixty  million  acres 

of  swamp  or  overflowed  lands.     The  notable  thing  about 

swamp  land  is  that  it  is  frequently  of  very  high 

Swamp 
quality.     Take,  for  example,  the  swamp  lands  lands: 

along   the   Mississippi.     They   consist   of   rich,   Extent  and 

deep  soil  that  has  been  deposited  by  the  river 

throughout  the  ages.     This  soil  is  formed  of  the  finest  silt, 

the  scourings  of  many  different  kinds  of  rocks  carried  down 

from  the  headwaters  of  the  Mississippi  and  its  tributaries. 

When,  in  contrast  to  this,  one  considers  that  in  certain 

sections  of  the  country  farmers  are  attempting  to  raise 

crops  on  poor  soil  eight  or  ten  inches  in  depth,  it  will 

readily  be  seen  that  swamp  lands  when  drained  will  present 


98  American  Economic  Life 

opportunities  far  superior  to  those  now  offered  by  the 
average  farm  land. 

At  the  session  of  1905- 1906,  Congress  appropriated 
$15,000  for  the  purpose  of  surveying  the  swamp  lands  on 
The  pro-  the  ceded  Chippewa  Indian  reservations  in 
posed  work.  Minnesota.  The  report  on  the  survey  shows 
that  it  is  possible  to  drain  267,000  acres  of  land  and  to  im- 
prove 135,000  additional  acres.  The  total  cost  of  this  work 
is  estimated  at  slightly  over  $1,000,000,  while  the  cost  per 
acre  will  vary  from  $1.62  to  $3.23.  Since  this  is  a  region 
in  which  drained  lands  are  worth  from  $12  to  $15  an  acre, 
the  government  can  readily  afford  to  invest  in  the  project. 

Perhaps  the  two  best  known  swamps ,  are  the  Florida 
Everglades  and  the  Dismal  Swamp  of  Virginia.  The 
The  Florida  Everglades  is  a  swamp  during  the  wet  season 
Everglades.  ori\y^  anc[  even  ftizn  there  are  stretches  of 
prairie.  These,  however,  are  rendered  inaccessible  by  the 
water  runs.  Some  private  attempts  have  been  made  to 
drain  the  Everglades,  and  these  have  been  singularly 
successful.  The  soil,  consisting  of  silt  and  decayed  vege- 
table matter,  ranges  from  three  to  fifteen  feet  in  depth  and 
is  remarkably  rich.  The  Everglades  cover  more  than  three 
million  and  a  half  acres,  a  large  portion  of  which  is  drain- 
able  at  reasonable  expense. 

The  Dismal  Swamp  is  covered  by  patches  of  water 
which  are  seldom  more  than  two  or  three  feet  in  depth. 
The  Dismal  Like  the  Everglades,  the  Dismal  Swamp  pre- 
Swamp.  sents  no  serious  engineering  difficulties.  It  is 
merely  a  big  project  which  must  be  handled  on  a  large 
scale  and  which  consequently  must  not  be  left  to  in- 
dividual or  state  authorities. 

In  Louisiana  near  New  Orleans,  in  Minnesota,  in  North 


Land  Reclamation  99 

Dakota,  in  the  Red  River  Valley  in  Oklahoma,  and  in 
parts  of  California,  considerable  draining  has  been  pri- 
vately undertaken  and  has  met  with  great  sue-  other  swamp 
cess.  But  reclamation  projects,  like  those  of  lands- 
irrigation,  must  be  undertaken  on  a  scale  which  is  too  vast 
for  individual  enterprise  and  which  can  be  most  justly  and 
equitably  administered  only  by  an  agency  of  the  Federal 
government. 

There  are  over  70,000,000  acres  of   land  available  for 
cultivation  and  wonderfully  rich  in  productive  power,  if 
only  water  can  be  supplied  to  them  in  sufficient  The      . 
quantities.     On  the  other  hand,  there  are  an-  lem  before 
other  60,000,000  acres  which  will  become  won-  V* 
derfully  productive,  if  they  can  be  properly  drained.     The 
problem  of  supplying  the  water  in  one  case  and  of  remov- 
ing it  in  the  other  is  intricate,  demanding  careful  study, 
highly  specialized  mechanical  appliances,  and  vast  outlays 
of  capital.     It  is  therefore  apparent  that  such  conditions 
can  be  best  met,  not  by  individual  or  state  action,  but  only 
by  the  effective  power  and  authority  of  the  central  govern- 
ment. 

QUESTIONS  FOR  RECITATION 

1.  Define  land  reclamation ;  irrigation. 

2.  Why  is  land  reclamation  important? 

3.  How  may  irrigation  be  accomplished? 

4.  What  was  the  earliest  irrigation  project  in  America? 

5.  Explain  the  later  projects  of  the  nineteenth  century. 

6.  Give  the  provisions  of  the  Act  of  1902. 

7.  What  are  the  advantages  of  irrigation? 

8.  Where  are  the  principal  swamp  lands  of  the  United  States? 

9.  How  has  the  drainage  of  swamp  lands  heretofore  been  chiefly 
provided  for? 

10.   What  problem  confronts  the  United  States  with  regard  to 
both  phases  of  land  reclamation? 


ioo  American  Economic  Life 

PROBLEMS  FOR  DISCUSSION 

i.   What  does  irrigation  show  us  in  regard  to  man's  control  over 
his  environment  ? 

2.  Is  the  government  interfering  with  a  "divine  plan"  when  it 
irrigates  barren  land  ? 

3.  In  what  sense  is  Eastern  agriculture  "a  poor  substitute  for 
irrigation"? 

4.  Why  was  irrigation  not  taken  up  by  the  government  earlier 
in  the  history  of  the  country  ? 

5.  What  is  yet  to  be  accomplished  by  mean^  of  irrigation? 

6.  Is  it  better  to  irrigate  the  land  of  the  United  States  or  to  go 
over  into  Canada  and  take  up  the  "free  land"? 

7.  Has  the  purpose  of  the  Act  of  1902  been  accomplished? 

8.  Why  are  swamps  so  rich? 

9.  Why  are  they  not  more  extensively  drained  and  used? 

10.  On  what  grounds  can  the  national  government  justify  its 
activities  in  the  reclamation  of  land  ? 

11.  Show  what  has  been  accomplished  in  Europe  in  regard  to 
land  reclamation. 

12.  Discuss  the  relation  between  rainfall  and  density  of  popula- 
tion. 

13.  Discuss  the  relationship  existing  between  land  reclamation 
and  the  law  of  diminishing  returns. 

SUPPLEMENTARY  READING 

Annals  American  Academy  of  Political  and  Social  Science,  Conser- 
vation of  Natural  Resources. 

Harwood,  W.  S.     The  New  Earth,  Chap.  XIII. 

Proceedings  of  the  Conference  of  Governors  (1908). 

Reports  of  National  Conservation  Commission. 

United  States  Census  Reports  on  Irrigation. 

Van  Hise,  C.  R.  Conservation  of  Natural  Resources  in  the  United 
States. 


CHAPTER  XI 

Forest  Conservation 

I.  The  forests  of  the  United  States 
i.   Their  importance  , 

2.  Groups  of  forests  : 

a.  The  Northeast  Forest 

b.  The  Southern  Forest 

c.  The  Lake  State  Forest 

d.  The  Rocky  Mountain  Forest 

e.  The  Pacific  Coast  Forest 

3.  Consumption  of  wood 

II.   The  destruction  of  forests 

1 .  The  causes : 

a.  Effect  of  early  attitude 

b.  Forest  fires 

2.  The  effects: 

a.  On  the  wood  supply 

b.  On  freshets  and  floods 

c.  On  washouts 

d.  On  droughts 

e.  On  water  power 

3.  The  remedy 

Forests  of  the  United  States.  —  Forest  resources,  when 
properly  conserved,  constitute  one  of  the  greatest  sources 
of  national  prosperity  and  social  welfare.     Al-  Their  im- 
though  forests  are  usually  thought  of  as  sources  P°rtance- 
of  lumber  supply,  their  greatest  value  lies  in  the  part  they 
play  in  the  conservation  of  soil  moisture.     While  lumber  is 


102  American  Economic  Life 

important  and  production  at  times  depends  upon  it, 
substitutes  for  wood  may  be  found.  But  for  soil  moisture 
there  is  no  substitute  ;  every  crop  of  grain,  vegetables,  and 
fruit  depends  upon  it.  Its  conservation,  therefore,  is  a 
matter  of  utmost  importance.  In  addition  to  maintaining 
soil  moisture,  forests,  by  insuring  a  regular  stream  flow, 
guarantee  constant  water  power  and  regular  water  trans- 
portation. Considering,  therefore,  their  direct  and  in- 
direct value,  forests  serve  as  many  useful  purposes  as  any 
other  natural  resource. 

A  forest  survey  of  the  United  States  shows  that  five 
groups  of  states  embrace  the  naturally  timbered  areas 
Groups  of  of  the  country,  —  the  Northeastern  States,  the 
forests:  Southern  States,  the  Lake  States,  the  Rocky 
Mountain  States,  and  the  Pacific  States. 

In  the  Northeast  district  the  present  stand  is  mainly 
spruce,  and  second  growth  of  white  pine,  hemlock,  and 
The  North-  hardwoods.  For  many  years  the  most  char- 
east  Forest.  acteristic  tree  of  this  forest  was  the  white  pine, 
a  tree  that  has  long  enjoyed  great  commercial  importance. 
The  chief  district  where  this  tree  grows  in  marked  abun- 
dance is  in  the  confines  of  northern  United  States.  This 
white  pine  is  soft,  light,  easily  worked,  suitable  for  the 
cabinetmaker,  joiner,  carpenter,  and  pattern  maker. 
Formerly  this  wood  was  used  for  general  construction  to  a 
greater  extent  than  any  other  wood  in  the  United  States. 
But  white  pine  is  now  becoming  so  scarce  that  the  best 
grades  have  risen  in  price  enormously.  In  this  North- 
eastern Forest  another  tree  is  worthy  of  special  mention, 
—  the  spruce,  which  is  extensively  used  for  wood  pulp. 

In  the  South  are  found  four  types  of  forest,  which,  broadly 
speaking,  may  be  said  to  divide  the  land  among  them 


Forest  Conservation  103 

according  to  elevation  above  sea  level.  The  swamp  forests 
of  the  Atlantic  and  Gulf  coasts  and  the  bottom  lands  of 
the  rivers  furnish  cypress  and  hardwoods.  The  The  South- 
remainder  of  the  coastal  plain  from  Virginia  ern  Forest. 
to  Texas  was  originally  covered  with  Southern  or  "  yellow  " 
pine,  —  the  trade  name  under  which  the  lumber  of  several 
pines  is  marketed.  The  plateau  encircling  the  Appalachian 
range  and  the  lower  part  of  the  mountain  region  itself 
support  a  hardwood  forest,  while  the  higher  ridges  are 
occupied  by  conifers,  —  mainly  spruce,  white  pine,  and 
hemlock. 

The  Lake  States  still  contain  many  hardwood  forests 
in  their  southern  portions.     In  the   north  the  The  Lake 
coniferous  forest  includes,  besides  the  rapidly  state  Forest- 
dwindling  pine,  considerable  tamarack,  cedar,  and  hemlock. 

The  forests  of  the  Rockies  occupy  isolated  mountain 
chains  separated  by  grazing  lands,  deserts,  or  cultivated 
valleys.     The  location  of  these  isolated  patches 
of  forests  is  determined  largely  by  the  degree  Mountain 
of  moisture  and  the  extent  of  forest  fires.     The 
chief  timber  trees  of  this  belt  are  Western  yellow  pine,  a 
species  of  spruce,  and  the  red  fir. 

The  last  great  stretch  of  woodland  is  the  Pacific  Coast 
Forest,  extending  along  the  coast  west  of  the  Rocky  Moun- 
tain Forest,  and  running  through  the  states  The  Pacific 
of  California,  Washington,  and  Oregon.  This  Coast  Forest. 
forest  is  the  most  densely  timbered  of  any  in  the  country, 
perhaps  in  the  world.  The  characteristic  trees  of  the 
district  are  of  the  fir  species,  especially  that  known  as  the 
Douglas  fir.  Other  trees  found  in  addition  to  the  Douglas 
fir  are  the  Western  hemlock,  Western  yellow  pine,  red- 
wood, and  cedar.    Thus  the  forest  areas  of  the  United 


104  American  Economic  Life 

States  contain  a  wide  range  of  both  conifers  and  hard- 
woods. 

The  United   States  was  endowed  originally  with  rich 

forest  resources ;    but,  like  a  spendthrift,  the  nation  has 

consumed  these  riches  in  an  extravagant  fashion. 

Consump-  ° 

tion  of  According  to  government  figures  the  population 

of  the  United  States  from  1880  to  1900  increased 
fifty-two  per  cent,  while  the  increase  in  lumber  cut  during 
the  same  period  was  no  less  than  ninety-four  per  cent.  Our 
present  annual  consumption  of  wood  in  all  forms  is  more 
than  three  times  as  great  as  the  annual  growth  of  our 
forests.  So  great  has  been  this  increase  in  the  consumption 
of  wood  that  the  source  of  supply  has  steadily  shifted,  west- 
ward, until  to-day  the  product  of  the  Pacific  States  furnishes 
a  large  proportion  of  the  total  output  of  the  country. 

Destruction  of  Forests.  —  Because  so  many  forest  tracts 

have  been  cut  over  and  left  desolate,  the  United  States 

has  now  reached  a  point  where  its  remaining 

Effect  0f        forests     are     vitally     important.     This     forest 

early  destruction  may  be  said  to  have  resulted  origi- 

altitude.  *  ■  .      ° 

nally  from  the  effect  01  our  early  attitude 
toward  forests.  To  the  American  settler  the  forest  was 
an  enemy.  Not  only  did  it  stand  in  the  way  of  the  develop- 
ment of  agriculture,  but  it  sheltered  Indians  and  wild 
beasts.  Therefore,  the  early  settler  naturally  said,  "  Why 
take  care  of  an  enemy  ?  "  Accordingly,  he  began,  as  rapidly 
as  possible,  to  clear  the  land  of  forests  and  to  devote  it  to 
the  purpose  of  sustaining  life.  In  this  way  a  habit  of  mind 
was  engendered  that  has  had  its  logical  outcome  in  the  ac- 
tion of  the  "  timber  butcher,"  who  clears  the  land  of 
everything  "  ten  inches  through  and  eighteen  inches  from 
the  ground.' ' 


Forest  Conservation  105 

Another  cause  of  the  destruction  of  forests  is  the  spread 
of  forest  fires,  against  which  little,  if  any,  scientific  means 
of  prevention  has  been  taken.  This  loss  from  fire 
has  been  estimated  at  fifty  million  dollars  an- 
nually. In  unsettled  districts  the  sparks  from  locomotives 
start  these  fires,  which,  unchecked,  except  by  adverse  wind 
and  natural  barriers,  gain  good  headway  before  they  are 
discovered,  and  burn  over  thousands  of  acres  of  forest  land. 
This  was  the  case  in  1893  with  the  Hinckley  fire  in  Min- 
nesota, which  destroyed  millions  of  dollars'  worth  of  prop- 
erty and  hundreds  of  lives.  This  fire  smoldered  for  two 
weeks  before  a  high  wind  came  and  drove  it  fiercely  through 
the  forests.  At  any  time  during  these  two  weeks,  an  effort 
on  the  part  of  skilled  foresters  could  have  extinguished  the 
fire  and  saved  the  lives  and  property  later  sacrificed. 

What,  now,  are  the  effects  of  this  willful  destruction  of 
forests?  Naturally  the  first  result  of  the  ruthless  cutting 
and  destruction  of  timber  is  to  deprive  the  com-  Effects:  On 
munity  of  its  supply  of  wood.  Experts  tell  us  ™<>od  supply. 
that,  at  our  present  rate  of  consumption,  our  supply  of 
commercial  timber  will  last  but  another  generation.  This 
problem,  while  very  serious  in  itself,  might  be  solved 
through  the  importation  of  wood,  or  the  gradual  replanting 
of  forest  areas.  There  is,  however,  another  phase  of  this 
question  still  graver  in  aspect. 

When  a  mountain  range  is  cut  clean  of  timber,  the  brush 
and  limbs  are  left  scattered  over  the  bare  tract.  A  dry 
season  comes  and  a  passing  hunter  drops  a  on  freshets 
match,  or  a  locomotive  throws  a  spark,  among  andfl°ods- 
this  brush.  The  consequence,  as  we  have  seen,  is  a  forest 
fire.  The  fire,  supplied  with  the  most  combustible  materials 
in  the  way  of  dried  branches  and  leaves,  burns  fiercely. 


106  American  Economic  Life 

Most  of  the  vegetable  matter  is  removed  from  the  top  of 
the  ground,  and  the  surface  of  the  earth  is  baked  hard. 
Then  comes  a  rain,  which,  instead  of  soaking  into  the 
ground  as  it  ordinarily  does  in  a  wooded  district,  runs  off 
rapidly  into  the  streams,  causing  a  freshet.  If  the  rain  has 
been  extensive  enough  and  has  covered  a  large  tract  of 
deforested  country,  the  result  is  a  flood  of  serious  pro- 
portions. 

Again,  in  agricultural  districts  where  the  timber  has 

been  cut  from  the  top  of  hills,  a  heavy  rain,  running  off 

rapidly,  washes  the  soil  from  the  slopes  down 

On  washouts.    .  x 

into  the  valleys.  One  of  the  great  problems 
which  mountain  farmers,  who  have  allowed  their  timber 
to  be  removed,  now  face  is  that  of  preventing  washouts 
on  the  sloping  fields. 

There  is  still  another  phase  of  the  problem.  As  it 
exists  in  nature,  the  spongy  vegetable  matter  in  the  forests 

holds  the  water  which  falls  in  rainy  seasons, 

On  droughts.  .  ■*»*•«  , 

and  allows  it  to  filter  gradually  off  into  the 
springs  and  streams  during  the  drier  times.  Where  forest 
areas  have  been  destroyed,  drought  is  becoming  a  serious 
problem  in  many  agricultural  regions  during  the  late 
summer  months.  In  districts  where  forests  have  been 
removed,  men  are  surprised  to  find  that  springs  and 
streams  dry  up  in  the  summer. 

Finally,  the  results  of  deforestation  are  not  all  direct. 
The  industries  of  the  country  are  depending  more  and 
On  water  more  upon  water  power  as  a  motive  force.  In 
power.  districts  where  turbines  have  been  set  up  and 

water  power  is  being  converted  into  electricity,  low  streams 
in  the  dry  summer  months  force  the  factories  to  close  tem- 
porarily.    One  of  the  greatest  drawbacks  to  generating 


Forest  Conservation  107 

power  on  small  streams,  therefore,  is  the  fact  that  they  are 
flooded  with  water  in  the  spring  and  empty  in  the  fall. 
If  there  were  timber  land  at  the  headwaters,  both  condi- 
tions would  be  obviated. 

Thus  we  see  that  a  shortage  of  timber  supply,  with  a 
consequent  rise  in  the  price  of  lumber,  disastrous  freshets 
and  floods,  the  washing  away  of  sloping  lands,  and  the 
failure  of  springs  and  streams  are  all  phenomena  resulting 
from  deforestation. 

These  evils  can  be  remedied  only  by  a  vigorous  policy 
of  conserving  our  existing  forests,  and  by  entering  upon 
a  national  campaign  of  reforestation.  If,  at  The 
our  present  rate  of  consumption,  the  timber  remedy 
supply  of  the  country  will  last  but  a  generation,  it  is 
absolutely  necessary  that  every  stick  of  it  should  be 
guarded  ;  that  it  should  not  be  wantonly  destroyed  through 
forest  fires  or  timber  cutting ;  and  that  proper  provision 
should  be  made  for  replacing  every  tree  consumed.  To 
meet  this  situation  state  action  is  inadequate ;  a  compre- 
hensive national  policy  is  imperative.  The  United  States 
must  follow  the  example  of  European  countries  and  insist 
upon  a  rigid  policy  of  conservation  of  its  remaining  forest 
areas. 

QUESTIONS   FOR  RECITATION 

1.  Explain  the  importance  of  forests. 

2.  Describe  the  chief  groups  of  forests  in  the  United  States. 

3.  What  are  the  uses  of  white  pine  ?    Where  is  it  found  ? 

4.  What  woods  have  the  widest  use  commercially?  Where 
are  they  found  ? 

5.  Where  are  the  largest  trees  found  in  the  United  States?  Of 
what  use  are  they? 

6.  Compare  our  yearly  consumption  of  wood  with  the  annual 
growth  of  trees. 


108  American  Economic  Life 

7.  Show  the  necessity  of  conserving  our  forests. 

8.  What  was  the  attitude  of   the  early  settler   toward  forests, 
and  what  was  its  effect  ? 

9.  Show  how  forest  fires  originate  and  the  harm  they  accom- 
plish. 

10.  Discuss  the  chief  effects  of  the  destruction  of  forests. 

11.  Describe  the  remedy  for  the  evils  of  deforestation. 

PROBLEMS  FOR  DISCUSSION 

1.  Contrast  two  regions  in  the  United  States,  —  one  where  forests 
have  been  destroyed,  the  other  where  forests  have  been  conserved. 

2.  Discuss  what  scientific  forestry  means. 

3.  Describe  the  forestry  service  of  France  or  Germany. 

4.  What  would  scientific  forestry  do  for  the  United  States  ? 

5.  What  steps  have  thus  far  been  taken? 

6.  Apply  the  law  of  diminishing  returns  to  forests. 

7.  Discuss  the  work  of  Gifford  Pinchot. 

8.  What  justification  can  be  advanced  for  government  forest 
reserves  ? 

9.  Outline  the  chief  points  in  a  comprehensive  policy  of  forest 
conservation. 

10.  Outline  the  economic  advantages  of  preserving  the  forests. 

11.  Describe  the  work  of  your  State  University  in  forestry. 

12.  Draw  a  map  locating  the  great  forest  areas  of  the  United 
States. 

SUPPLEMENTARY  READING 

Annals  American  Academy  of  Political  and  Social  Science.  Con- 
servation of  Natural  Resources. 

Harwood,  W.  S.     The  New  Earth,  Chap.  X. 

Pinchot,  G.    A  Primer  of  Forestry. 

Smith,  J.  R.     Commerce  and  Industry,  Chap.  X. 

Van  Hise,  C.  R.  Conservation  of  Natural  Resources  in  the  United 
States. 


CHAPTER  XII 

Water  Possibilities 

I.  Water  as  a  source  of  power 
i .   Its  early  use 

2.  Why  used  to-day 

3.  Method  of  utilization 

4.  Examples  of  utilization : 

a.  At  Niagara  Falls 

b.  On  the  Pacific  Coast 

c.  In  the  future 

5 .  The  resulting  problem 

6.  The  attempted  solution 

II.   Water  as  a  means  of  transportation 

1 .  Our  inland  waterways  : 

a.  Their  great  extent 

b.  Their  early  importance 

c.  Why  valuable  to-day 

d.  Effect  of  Panama  Canal 

e.  Water  transportation  cheap 

2.  Problems  of  the  Mississippi  River : 

a.  The  cutting  of  the  banks  : 

(1)  The  cause 

(2)  The  remedy 

b.  The  flooding  of  the  river : 

(1)  The  cause 

(2)  The  remedy 

c.  The  cost  of  conservation 

3.  General  conclusion 

Water  as  a  Source  of  Power.  —  One  of  the  resources 
which  the  early  colonists  found  in  comparative  abundance 

109 


no  American  Economic  Life 

was  water  power.  Throughout  New  England  and  in  cer- 
tain parts  of  the  South,  there  were  innumerable  streams 
its  early  which  had  a  high  gradient  and  from  which 
use-  considerable  water  power  could  be  developed. 

Therefore,  when  manufacturing  was  begun  in  the  colonies, 
the  power  used  was  naturally  water  power.  The  water 
wheel  was  set  down  directly  in  the  stream,  a  race  was 
constructed,  and  the  revolving  wheel  was  connected  by 
belts  and  shafts  with  the  machinery  in  the  mill. 

However,  the  discovery  of  coal,  the  application  of  steam 
to  industry,  and  the  development  of  steam-propelled 
why  used  machinery,  which  came  between  1750  and  1825, 
to-day.  completely  revolutionized  the  source  of  power 

utilized  in  American  industries.  When  the  great  coal  beds 
were  discovered,  there  was  an  immediate  rush  to  exploit 
them ;  and  during  the  nineteenth  century  the  United 
States  occupied  itself  in  mining  coal  as  fast  as  it  could  be 
used  in  industry.  With  the  advent  of  the  twentieth 
century,  however,  a  change  occurred  which  very  materially 
altered  the  situation.  Coal,  particularly  anthracite  coal, 
rose  in  price  to  figures  which  became  almost  prohibitive  in 
certain  industries.  The  situation  was  also  aggravated  by 
labor  troubles  which  rendered  the  coal  supply  at  times  un- 
certain. In  addition  to  this,  experts  declared  that  the 
available  supply  of  coal  in  the  United  States  might  be 
exhausted  in  from  fifty  to  one  hundred  and  twenty-five 
years.  At  the  same  time,  it  was  estimated  that  the 
development  of  water  power  in  the  United  States  would 
produce  an  equivalent  of  780,000,000  tons  of  coal  a 
year. 

Under  these  circumstances  attention  was  directed  toward 
the  utilization  of  water  as  a  source  of  power.     The  develop- 


Water  Possibilities  in 

ing  knowledge  of   electrical  appliances  made  possible   a 
revolution  in  the  methods  of  using  water  power.     The 
old  waterwheel  was  abandoned ;  electrical  tur-  Method  of 
bines  were  installed  at  the  stream;  the  water  utilization, 
power  was  converted  into  electricity,  and  this  was  com- 
municated over  wires  for  great  distances. 

The  most  noteworthy  instance  of  this  conversion  of  water 
power  into  electricity  is  seen  at  Niagara  Falls.     Here  are 
situated  two  plants.     The  one  below  the  Falls  Examples. 
on  the  American  side  is  located  in  the  Gorge.  Niagara 
The  water  for  its  use  is  drawn  from  the  upper  Falls' 
Niagara  River ;   it  then  runs  through  the  city  of  Niagara 
Falls  and  is  discharged  near  the  first  Suspension  Bridge. 
This  plant  is  so  situated  as  to  be  able  to  utilize  a  fall  of 
two  hundred  and  fifteen  feet  of  water.     However,  it  has 
certain  obvious  disadvantages.    First,  its  buildings  dis- 
figure the  Gorge ;    and,  in  the  second  place,  the  plant  is 
difficult  of  access. 

The  power  plant  above  the  Falls  is  a  rather  novel  one. 
To  construct  it  a  pit  one  hundred  and  fifty  feet  deep  is 
dug  in  the  solid  rock,  and  at  the  bottom  of  this  pit  the 
turbines  are  placed.  The  motion  generated  in  the  turbines 
is  returned  to  the  electric  generators  at  the  surface  by 
means  of  steel  shafts.  The  power  generated  at  the  Falls 
supplies  not  only  the  industrial  plants  in  the  immediate 
neighborhood,  but  the  electricity  is  carried  to  Buffalo, 
where  it  is  used  as  a  source  of  power  for  trolley  cars,  for 
street  and  house  lighting,  grain  elevators,  and  factories. 

While  this  is  the  most  notable  example  in  the  country 
of  the  development  of  water  power,  the  Pacific  Coast  also 
presents  instances  of  its  utilization.  The  important  thing 
about  Niagara  Falls  is  the  volume  of  its  water.     On  the 


ii2  American  Economic  Life 

Pacific  Coast  there  are  no  bodies  of  water  so  large,  but 
the  fall  which  is  secured  is  very  great.  For  example,  a 
On  the  Pa-  part  of  the  electric  power  used  at  San  Francisco 
cific  Coast.  js  SUppHed  from  a  plant  located  at  the  foot  of 
a  hill  five  hundred  feet  high,  down  which  the  water  for  the 
generation  of  the  electricity  is  carried  in  steel  tubes.  The 
velocity  of  the  water  when  it  reaches  the  power  plant  is 
stated  at  fourteen  thousand  feet  per  minute.  After  the 
power  has  been  generated  in  this  plant,  it  is  carried  one 
hundred  and  fifty  miles,  at  a  pressure  of  from  forty  thou- 
sand to  eighty  thousand  volts,  with  a  loss  of  about  one- 
fourth  of  the  power. 

There  are  many  other  sections  of  the  country  where  in 
the  future  the  use  of  water  power  may  become  general. 
Inthe  The   falls   at   Sault   Ste.   Marie  between  Lake 

future.  Huron  and  Lake  Superior  have  a  drop  of  only 

twenty  feet,  and  yet  the  volume  of  water  is  so  enormous 
as  to  make  possible  the  development  of  a  great  amount  of 
power.  Likewise,  the  innumerable  small  rivers  along  the 
Atlantic  Coast  furnish  in  the  aggregate  a  considerable 
source  of  water  power.  Again,  those  who  propose  regu- 
lating the  flow  of  the  Mississippi  River  by  the  construction 
of  reservoirs  at  its  headwaters  estimate  that  from  these 
reservoirs  about  fifty  million  horse  power  may  be  developed. 

The  real  impetus  to  the  use  of  water  power  in  modern 
industry  was  given  in  the  last  decade  of  the  nineteenth 
The  result-  century,  when  it  was  found  that,  by  means  of  it, 
ing  problem,  electricity  might  be  cheaply  generated  and 
then  carried  great  distances  for  commercial  purposes. 
Indeed,  the  possibilities  of  water  power  have  become  so  great 
that  many  conservationists  who  are  working  for  the  proper 
care  of  natural  resources  have  shifted  their  emphasis  from 


Water  Possibilities  113 

the  conservation  of  forests  and  minerals  to  that  of  water 
power.  This  they  have  done  because  they  realize  that 
individuals  and  corporations,  through  a  monopoly  of  water 
power  sites,  might  secure  an  unshakable  grip  on  one  of  the 
most  valuable  natural  resources  of  America. 

For  the  purpose  of  protecting  these  sites  and  at  the 
same  time  to  make  possible  the  utilization  of  water  power 
resources,  Congress  in  1920  enacted  a  water  The 
power  bill  which  permits  the  leasing  of  water  attempted 
power  sites  by  the  Federal  government.  In  this 
manner  the  solution  of  this  vexatious  problem  is  attempted. 
Under  the  provisions  of  this  law  a  commission,  consisting 
of  the  Secretaries  of  War,  Agriculture,  and  Interior,  is 
empowered  to  lease,  up  to  fifty  years,  the  water  power 
rights  on  all  public  lands,  forest  and  Indian  reservations, 
and  on  navigable  streams.  With  the  lapse  of  the  lease, 
the  government  has  the  option  of  taking  over  at  an 
appraised  valuation  the  plants  that  have  already  been 
constructed,  or  of  re-leasing  them,  or  of  leasing  them  at 
the  appraised  valuation  to  any  company  the  commission 
may  choose.  Thus  the  property  rights  remain  with  the 
government,  and  the  water  power  commission  is  authorized 
to  specify  the  royalties  to  be  paid  the  government  under 
the  leases.  In  the  West,  where  water  power  sites  are 
plentiful,  the  application  of  this  law  is  especially  valuable 
to  social  development. 

Water  as  a  Means  of  Transportation.  —  Quite  a  different 
problem  is  presented  by  water  transportation.  Here, 
there  is  no  danger  of  monopoly,  since  the  ownership  of  the 
transportation  facilities  already  lies  in  the  government. 
In  the  United  States,  therefore,  the  problem  of  water  trans- 
portation is  solely  a  problem  of  wise  use  and  development. 


H4  American  Economic  Life 

Nowhere  in  the  world  is  there  a  duplicate  of  the  inland 
waterways  of  the  United  States.  On  the  north  lie  the 
inland  Great  Lakes,  which  provide  eighteen  hundred 

waterways :  miles  of  navigable  water ;  on  the  east  and  west 
Their  great  coasts  are  numerous  small  navigable  streams. 
In  the  heart  of  the  continent,  reaching  into 
twenty- two  of  the  states,  is  the  Mississippi  River  System, 
which  is  navigable  for  more  than  a  thousand  miles.  Al- 
though the  twenty-two  states  reached  by  the  Mississippi 
River  System  furnish  by  far  the  greater  part  of  all  the 
exports  of  the  United  States,  the  bulk  of  the  agricul- 
tural products,  and  more  than  half  of  the  manufactured 
products,  the  river  system  is  but  little  used  for  trans- 
portation. 

The  early  colonists  depended  upon  water  transportation, 
as  they  did  upon  water  power,  because  of  the  abundance 
Their  early  of  water  and  also  because  there  was  no  other 
importance.  ea^y  means  0f  getting  from  place  to  place.  The 
few  roads  that  existed  were  wretched.  Therefore  the 
streams  became  the  highways  of  trade  and  travel,  and 
settlements  were  made  either  on  the  coast  or  along  the 
rivers. 

The  application  of  steam  to  industry  led  to  the  gradual 
abandonment  of  both  water  power  and  water  trans- 
Wh  portation.     In  both   cases,   however,   the   time 

valuable  has  now  been  reached  when  steam  power  will 
no  longer  suffice ;  and,  in  order  to  maintain  our 
industrial  efficiency,  it  has  become  necessary  to  fall  back 
upon  natural  power.  In  both  cases,  likewise,  the  diminu- 
tion of  the  coal  supply  has  played  a  leading  part  in  the 
utilization  of  water.  In  the  case  of  transportation,  how- 
ever, there  is  another  factor  of  perhaps  greater  importance. 


Water  Possibilities  115 

In  prosperous  years  the  railroads  of  the  country  are  unable 
to  handle  the  freight  traffic.  Some  other  means  of  trans- 
portation is  therefore  imperative. 

The  value  of  our  inland  waterways  has  been  enhanced 
by  the  opening  of  the  Panama  Canal  and  by  the  develop- 
ment of  trade  with  South  America.     This  com-  E„t  , 
bination  of  circumstances  makes  the  Gulf  the   Panama 
natural  outlet  for  a  great  amount  of  the  produce 
of  the  Mississippi  Basin.     If  to  this  fact  is  added  the  ease 
with  which  heavy  freight  may  be  shipped  by  water,  it  is 
plain   that   logically   a   great  portion  of   the   Mississippi 
Basin's  heavier  products  will  go  to  the  Gulf  by  water. 

The  system  of  inland  waterways  and  the  network  of 
regional  canals  combine  to  produce  a  vital  effect  upon  the 
cost  of  transportation.  Some  idea  of  the 
relative  cost  of  shipping  by  water  and  by  rail  portation 
may  be  gained  by  a  comparison  of  the  rates 
charged  for  the  transportation  of  iron  ore  in  the  Great 
Lakes  region.  Between  Pittsburgh  and  Lake  Erie  there  is 
a  commerce,  composed  chiefly  of  iron  ore  and  coal,  amount- 
ing annually  to  about  30,000,000  tons.  The  ore  is  carried 
by  boat  from  Duluth  on  Lake  Superior  to  Ashtabula  on 
Lake  Erie,  a  distance  of  one  thousand  miles,  for  about 
eighty  cents  per  ton.  The  ore  is  then  loaded  on  cars  and 
carried  to  Pittsburgh,  a  distance  of  one  hundred  and  thirty- 
five  miles,  for  ninety  cents  per  ton,  so  that  it  costs  ten 
cents  more  to  ship  a  ton  one  hundred  and  thirty-five  miles 
by  rail  than  it  does  a  thousand  miles  by  water.  While 
these  rates  are  constantly  changing  with  cost  of  operation, 
it  is  always  true  that  it  costs  much  less  to  transport  goods 
by  water  than  by  rail.  The  great  danger  here,  however, 
lies  in  the  fact  that  railroads  endeavor  to  eliminate  the 


n6  American  Economic  Life 

cheaper  competitor  by  taking  the  water  routes  under 
their  own  control. 

Thus  water  transportation  possesses  inherently  a  de- 
cided advantage  over  land  transportation.  To  realize 
Pr  bi  ^e  *u^  Possit)ilities  of  transportation  by  water, 

Mississippi  however,  we  must  make  many  improvements  in 
the  Mississippi  River.  In  fact  this  river  presents 
some  serious  problems.  It  is  a  stream  of  bad  habits,  the 
worst  of  which  are  the  cutting  of  its  banks,  the  formation  of 
sand  bars  in  its  channel,  and  the  severity  of  its  floods. 

The  cutting  of  the  banks  is  due  to  curves,  technically 
called  "  meanders,"  and  to  the  river's  digging  under  the 
Cutting  of  bank  on  the  outside  of  the  curve,  particularly 
the  banks.  during  flood  times.  Sometimes  this  cutting 
amounts  to  one  hundred  or  one  hundred  and  fifty  feet  a 
year.  Since  the  channel  is  necessarily  on  the  outside  of 
the  curve,  and  since  grain  elevators,  docks,  and  other 
instruments  of  traffic  must  be  reached  by  means  of  this 
channel,  it  is  obviously  impossible  to  carry  on  commerce 
satisfactorily  if  the  river  is  undercutting  the  docks  and 
elevators  at  the  rate  of  one  hundred  feet  a  year. 

The  river  can  never  be  successfully  prevented  from 
cutting  its  banks  until  it  is  straightened.  This  may  seem 
almost  impossible ;  but  several  European  rivers  which 
were  particular  offenders  in  this  respect  were  made  narrower, 
the  change  resulting  in  a  higher  gradient  and  a  more  rapid 
current. 

Besides  straightening  the  river,  we  must  control  its 
seasonal  floods.  Spring  floods  and  summer  droughts  are 
Flooding  of  due  m  great  part  to  the  deforestation  of  the 
the  nver.  mountainous  country  at  the  headwaters  of 
rivers.     Great  areas  of  land  at  the  headwaters    of    the 


Water  Possibilities  117 

Mississippi  and  its  tributaries  have  been  practically  de- 
forested. Consequently,  in  rainy  seasons,  the  water 
rushes  off  from  the  soil  into  the  streams  and  causes  flood 
damage  farther  down.  Reforestation  would  eliminate 
much  of  this  danger.  The  work  may  be  further  facilitated 
by  the  building  of  storage  dams,  which  will  check  the 
floods  and  allow  the  surplus  water  to  flow  gradually  down 
through  the  lower  courses  of  the  river. 

The  straightening  of  the  Mississippi,  the  reforesting  of  the 
hills  at  its  headwaters,  and  the  building  of  storage  dams 
on  its  principal  tributaries  to  control  floods  may  c      , 
cost  two  hundred  or  even  three  hundred  million  conser- 
dollars ;    but,   if   the   full   possibilities   of   the 
Mississippi  Basin  are  to  be  realized,  sooner  or  later  these 
changes  must  be  made.     The  development  of  water  trans- 
portation will  involve  in  the  United  States,  as  it  has  in- 
volved in  Europe,  a  great  outlay  of  capital ;    but,  if  the 
experience  of  England  and  Germany  furnishes  any  basis 
for  judgment,  the  outlay,  even  though  it  be  a  great  one, 
will  be  more  than  justified. 

We  have  now  completed  our  survey  of  the  first  factor  of 
production,  —  the  land  of  the  United  States.  We  have 
examined  the  typical  resources  of  the  nation,  General 
its  fertile  soil,  its  varied  climate,  its  great  c<mdi»ion. 
mineral  deposits,  its  forest  resources,  and  its  water  possi- 
bilities. We  have  seen  that  nature  has  been  prodigal  in 
her  gifts  to  America,  and  that  man  has  often  been  equally 
prodigal  in  his  use  of  these  gifts.  Conservation,  in  the 
form  of  irrigation,  wise  use,  and  thrift,  is  therefore  essen- 
tial to  national  well-being.  But,  through  the  efforts  of 
the  proponents  of  this  ideal,  the  awakening  of  the  social 
conscience  has  been  accomplished  in  time  to  fulfill  its 


n8  American  Economic  Life 

purpose.  So  far  as  the  natural  resources  of  the  United 
States  are  concerned,  it  is  therefore  possible  for  the  Amer- 
ican people  to  achieve  national  prosperity  and  individual 
welfare. 

QUESTIONS  FOR  RECITATION 

i.   Why  was  water  power  used  extensively  by  the  early  colonists? 

2.  What  led  manufacturers  to  replace  water  power  by  steam? 

3.  What  has  caused  the  present  tendency  toward  the  increased 
use  of  water  power  ? 

4.  Describe  the  modern  method  of  utilizing  water  power. 

5.  Give  examples  of  modern  utilization  of  water  power  in  the 
United  States. 

6.  What  problem  has  arisen  from  the  modern  use  of  water  power? 
How  has  Congress  attempted  to  solve  this  problem  ? 

7.  Describe  the  largest  inland  water  system  in  the  world.   . 

8.  Why   was    water    transportation    originally    of   special   im- 
portance? 

9.  Why  is  water  transportation  important  to-day  ? 

10.  Explain  the  effect  of  the  Panama  Canal  upon  inland  water 
transportation  in  the  United  States. 

n.  Show  why  water  transportation  is  cheaper  than  land  trans- 
portation. 

12.  Discuss  the  problems  of  the  Mississippi  River. 

13.  What  method  should  be  followed  in  solving  these  problems? 
Why? 

14.  What  conclusions  do  you  draw  from  a  study  of  the  natural 
resources  of  the  United  States  ? 

PROBLEMS   FOR  DISCUSSION 

1.  Discuss  the  advantages  of  modern  water  power  over  modern 
steam  power. 

2.  What  advantage  has  steam  power  over  water  power? 

3.  In  what  respect  does  a  reversion  to  water  power  show  progress  ? 

4.  What  steps  must  be  taken  to  secure  the  most  economic  use  of 
water  power  ? 


Water  Possibilities  119 

5.  How  important  were  inland  waterways  before  1830? 

6.  Contrast  the  relative  merits  of  the  railroad  and  the  inland 
waterway. 

7.  Why  are  the  people  of  the  United  States  laying  new  em- 
phasis on  inland  water  transportation  ? 

8.  Name  the  leading  inland  waterway  systems  of  the  United 
States. 

9.  Apply  the  law  of  diminishing  returns  to  water  power. 

10.  Discuss  the  reasons  for  the  conservation  of  water  power  sites 
in  the  United  States. 

11.  Discuss  the  effects  of  the  Panama  Canal  upon  world  com- 
merce. 

12.  How  may  water  and  other  natural  resources  be  developed  and, 
at  the  same  time,  the  interests  of  the  public  be  protected  ? 

13.  Does  conservation  of  the  vast  resources  of  Alaska  mean  a 
locking  up  of  these  resources  ?    Explain. 

SUPPLEMENTARY  READING 

Annals  American  Academy  of  Political  and  Social  Science.  Con- 
servation of  Natural  Resources. 

Johnson,  E.  R.    Ocean  and  Inland  Water  Transportation. 

Smith,  J.  R.     Commerce  and  Industry,  Chaps.  IX,  XVI,  and  XL VI. 

United  States  Census  Reports.     Water  Power. 

Van  Hise,  C.  R.  Conservation  of  Natural  Resources  in  the  United 
States. 


CHAPTER  XIII 

The  Nature  of  Labor 

I.   Labor  as  a  factor  of  production 
i .    Importance  of  labor  : 

a.  In  production 

b.  In  the  city 

c.  In  the  country 

d.  In  modern  industry 
2.   Meaning  of  labor : 

a.  Examples 

b.  The  moral  element 

c.  The  final  test 

II.   How  labor's  productivity  may  increase 
i .   Increase  in  efficiency : 

a.  Why  important 

b.  How  effected : 
(i)  Negatively 
(2)  Positively 

2.  Increase  in  numbers  : 

a.  Through  natural  increase  : 

(1)  The  Malthusian  Law 

(2)  Checks  on  population 

b.  Through  immigration 

3.  The  conclusion 

Labor  as  a  Factor  of  Production.  —  While  there  are 
three  factors  of  production,  —  land,  labor,  and  capital,  — 
two  of  these  are  called  primary  because  they  are  the  original 
requisites  of  production.  The  first  of  these  primary  requi- 
sites  is. land;    the   other   is   labor.    The   United   States 

120 


The  Nature  of  Labor  121 

abounds  in  resources.  To  convert  these  resources  into 
economic  goods  labor  is  required.  Although  the  American 
Indian  inhabited  this  continent  for  centuries,  its  Ti 

Its  im 

vast  resources  were  practically  worthless  because  portance : 
the  Indian  was  not  naturally  a  laborer.     Labor  I*  produc- 
is  one  of  the  foundation  stones  of  production. 
Without  labor,  natural  resources  would  be  useless.     Labor, 
therefore,  bears  the  same  relation  to  land  that  mortar  does 
to  bricks ;  it  brings  natural  resources  together  into  a  per- 
manent structure. 

Labor  has  changed  the  face  of  the  earth  and  nowhere  is 
this  more  noticeable  than  in  the  city.  Indeed,  the  modern 
city  is  almost  wholly  the  product  of  labor.  In  In  the 
primitive  societies,  where  men  live  by  hunting  ctty- 
and  fishing,  nature  supplies  nearly  everything.  Even  in 
the  country  districts  to-day  the  trees,  the  grass,  the  flowers, 
the  rich  soil,  the  springs,  the  waterways,  the  clear  sky,  and 
the  clean  air  are  nature's  gift.  But  in  the  city,  natural 
things  have  been  altered.  The  trees,  the  flowers,  and  even 
the  grass  are  artificially  placed  and  protected  by  warning 
signs.  Water  can  no  longer  be  secured  from  a  near-by 
spring.  It  has  been  pumped  through  an  aqueduct  to  meet 
the  city's  needs.  Even  the  sky  and  air  are  polluted  by 
smoke  and  dust. 

In  short,  the  man  who  comes  to  the  modern  city  and 
looks  at  it  analytically  will  discover  that  natural  things 
are  at  a  premium.  Labor  has  shaped  every-  In  the 
thing  within  sight.  But  evidences  of  labor  do  countfy- 
not  appear  in  cities  alone.  The  man  plowing  his  ten-acre 
lot  is  laboring.  The  farmer's  reaping  machine,  his  house 
and  barn,  his  macadamized  road,  his  asparagus  bed,  his 
peach  orchard,  —  all  represent  an  outlay  of  labor. 


122  American  Economic  Life 

Again,  modern  industry  is  based  on  labor  cooperation. 
The  chair  upon  which  you  are  sitting  is  the  direct  or  indirect 
in  modem  result  of  the  labor  of  thousands  of  men,  women, 
mdustry.  an(j  chiidren#  It  was  cut  as  standing  timber  in 
the  woods  of  Michigan  with  axes  and  saws  made  in  New 
England  factories.  It  was  hauled  to  a  sawmill  on  bobsleds, 
the  bolts  of  which  were  made  in  Philadelphia,  while  the 
steel  runners  were  manufactured  in  Pittsburgh.  It  was 
sawed  by  a  band  saw  which  in  turn  was  produced  in  a  great 
factory  employing  several  thousand  men.  Then,  in  the 
form  of  sawed  lumber,  this  chair  was  shipped  to  a  furniture 
mill  over  a  railroad  employing  a  hundred  thousand  men. 
When  it  reached  the  furniture  factory,  the  lumber  went 
through  a  great  number  of  processes  until  it  was  converted 
into  a  chair ;  and  each  tool  in  each  process  was  manufac- 
tured in  a  different  city  in  a  different  part  of  the  country 
by  a  different  set  of  employees.  Finally,  the  finished  chair 
was  shipped  on  a  great  railway  system  to  the  city, 
where  it  was  handled  by  a  trucking  company,  delivered 
to  the  wholesale  house,  sold  to  the  retail  house,  and 
eventually  purchased  by  the  present  owner.  In  this  pro- 
cess labor  has  evolved  from  the  form  of  simple  cooperation 
to  that  of  division  of  labor  and  minute  specialization  in 
industry. 

In  economics,  when  we  speak  of  labor,  we  do  not  mean 
merely  manual  labor,  but  all  effort  either  mental  or  physical 
Meaning  of  which *s  expended  in  producing  economic  utilities, 
labor:  That  is,   labor  is  industrial  effort.     The  man 

Examples.  wj10  works  ^^  a  pjck  anc[  sn0vel  is  a  laborer ; 
so  is  the  woman  who  works  with  a  needle ;  so  is  the  man 
who  works  with  the  pen ;  so  is  the  man  who  works  with  a 
brush ;  so  is  the  man  who  spends  his  time  in  directing  the 


The  Nature  of  Labor  123 

energies  of  others  in  order  that  they  may  assist  in  produc- 
tion. All  of  these  persons  are  "  laborers  "  in  the  economic 
sense  because  the  laborer  is  one  who  expends  physical  or 
mental  effort  in  the  creation  of  economic  utilities. 

But  there  is  also  a  moral  element  in  labor.  While  labor 
manifests  itself  in  physical  and  mental  activities,  there  is, 
nevertheless,  a  moral  background  to  these  activ-  The  moral 
ities.  For  example,  the  honest  laborer  is  a  better  element- 
and  more  efficient  producer  than  the  dishonest  worker ;  the 
temperate  are  more  productive  than  the  intemperate  ;  and 
the  laborer  of  good  moral  standards  is  a  more  effective 
producer  than  one  of  loose  morality.  The  adage  "  Hon- 
esty is  the  best  policy  "  shows  the  economic  value  of  a 
moral  quality. 

Another  important  point  to  bear  in  mind  is  the  fact 
that  labor  cannot  always  be  measured  by  immediate  re- 
sults. It  is  easy  to  see  that  the  carpenter  is  a  The  final 
laborer  because  the  result  of  his  labor  is  visible  tesL 
and  tangible.  But  what  about  the  labor  of  the  policeman, 
of  the  clergyman,  of  the  lawyer,  of  the  teacher?  Such 
labor  may  extend  over  months  of  effort  and  yet  bear  no 
tangible  form.  Shall  we  say,  therefore,  that  their  labor 
is  unproductive?  Not  if  it  can  be  shown  that  such  labor 
has,  either  directly  or  indirectly,  aided  in  the  creation  of 
material  wealth.  The  creation  of  economic  utilities  is  the 
final  test  of  labor  and  these  may  be  arrived  at  indirectly 
as  well  as  directly.  If  the  policeman  protects  life  and 
property,  and  thereby  indirectly  aids  in  the  production 
of  material  wealth,  his  effort  is  industrial  effort  and  he  is  a 
productive  laborer.  Likewise  the  teacher,  by  increasing 
indirectly  the  power  of  the  student  to  produce  material 
wealth,  himself  becomes  a  productive  laborer. 


124  American  Economic  Life 

How  Labor's  Productivity  May  Increase.  —  Since  labor 

in  all  its  forms  is  an  essential  element  in  the  production  of 

wealth  and  in  the  maintenance  of  welfare,  every 

Increase  in  (  # * 

efficiency :  effort  should  be  directed  toward  increasing  its 
Why  im-  productivity  through  the  principles  of  conserva- 
tion and  efficiency.  Since  the  conservation 
principle  demands  that  the  things  of  the  present  be  used 
wisely  and  handed  on  to  the  future  in  the  best  possible 
condition,  it  may  be  applied  to  labor  in  exactly  the  same 
way  that  it  is  applied  to  natural  resources.  If  men  and 
women  are  overworked,  badly  fed,  poorly  housed,  their 
efficiency  will  be  lowered  and  hence  their  ability  to  produce 
will  be  lessened.  As  the  family  standard  is  low,  the  stand- 
ard of  their  children  will  be  low  from  birth.  Thus  the 
inefficiency  and  low  standards  of  one  generation  will  be 
reflected  in  decreased  efficiency  and  lower  standards  in  the 
next  generation ;  so  that  the  evil  conditions,  which  play 
so  large  a  part  in  making  men  and  women  evil,  will  be 
perpetuated.  Hence  there  arises  the  necessity  of  adopting 
some  policy  of  conserving  the  labor  force  of  the  country 
and  of  increasing  its  efficiency. 

Both  the  welfare  of  the  community  and  the  efficiency 
of  labor  depend  upon  labor  conservation.  How,  then, 
How  may  this  conservation  be  effected?     Chiefly  in 

effected.  j-wo  ways,  —  either  through  negative  or  posi- 
tive measures.  On  the  negative  side,  certain  factors,  like 
bad  living  conditions  and  insanitary  or  dangerous  working 
conditions,  must  be  corrected  by  purely  repressive  legis- 
lation. For  example,  laws  are  needed  which  will  regulate 
the  length  of  the  working  day  ;  which  will  insure  abundance 
of  air  and  sunlight  in  both  houses  and  factories ;  which 
will  protect  women  and  children   against  industrial  risks 


The  Nature  of  Labor  125 

and  accidents.  This,  however,  is  only  one  side  of  the 
question.  It  is  no  less  desirable  that  the  positive  factors 
in  the  problem  be  considered.  Welfare  and  efficiency 
depend  upon  education.  Men  in  ignorance  of  modern 
working  methods  cannot  do  good  work;  and,  since  work 
to-day  requires  intelligence,  it  follows  that  the  educated 
man  will  be  the  best  worker.  Furthermore,  modern  work, 
besides  being  arduous  and  monotonous,  is  wearing ;  hence 
some  form  of  recreation  and  relaxation  must  be  provided 
in  order  that  efficiency  may  be  maintained. 

The  productivity  of  labor  may  be  advanced  in  the  fore- 
going manner  (1)  by  increasing  the  efficiency  of  each  unit 
of  labor,  and  (2)  by  increasing  the  total  number        ■ 
of  units  of  labor.     That  is  to  say,  the  labor  force  numbers: 
of  a  nation  may  have  its  productivity  increased  Natura 

.  .  .  .  increase. 

either  through  improving  its  efficiency,  or 
through  increasing  its  numbers.  The  increase  in  numbers 
may  be  from  within  or  from  without.  When  the  increase 
takes  place  within,  it  is  a  natural  increase  brought  about 
by  an  excess  of  births  over  deaths.  For  example,  if  each 
family  contains  four  children,  population  will  double  itself 
every  generation,  and  the  labor  force  of  the  nation  will 
be  likewise  doubled.  If  this  increase  occurs  every  gener- 
ation, population  will  increase  geometrically  and  the  num- 
ber of  laborers  may  far  outstrip  the  means  of  supporting 
them.  This  was  the  well-known  view  of  Mai  thus,  who  pro- 
pounded his  theory  in  England  at  the  close  of  the  eighteenth 
century. 

Malthus  thought  that,  because  land  yielded  its  returns 
in  a  smaller  ratio  than  labor  multiplied,  man's  future  would 
be  gloomy  and  dreary.  He  pictured  population  as  out- 
stripping the  means  of  subsistence.    This  situation  did  not 


126  American  Economic  Life 

come  to  pass,  however,  because  man  has  delayed  the  oper- 
ation of  the  law  of  diminishing  returns  from  land  and,  at 
the  same  time,  has  overcome  the  tendency  of  population 
to  increase  in  geometrical  ratio.  Population  has  been 
checked  by  positive  and  negative  means.  On  the  positive 
side,  wars,  famines,  and  disease  have  kept  population  down  ; 
while  on  the  negative  side  late  marriages,  prudence,  and 
restraint  have  lowered  the  birth  rate.  In  fact,  to-day, 
in  many  places  conditions  are  just  the  reverse  of  what 
Malthus  pictured. 

The  labor  force  of  a  country  may  also  be  increased  by 

additions   from   without,    that   is,    through   immigration. 

Were  it  not  for  this  method  of  increase,  the  labor 

Through 

immigra-  force  of  the  United  States  would  not  be  nearly  so 
large  as  it  is.  As  the  nineteenth  century  ad- 
vanced, the  native  white  birth  rate  declined.  This  decline, 
however,  was  often  forgotten  in  the  tremendous  increase 
in  the  sum  total  of  our  population  brought  about  by  the 
vast  influx  of  European  immigrants  into  this  country. 
This  immigration  furnished  America  with  an  ever-increas- 
ing source  of  labor  supply  from  the  beginning  of  its  history 
up  to  the  second  decade  of  the  twentieth  century,  when 
the  World  War  temporarily  interrupted  the  rolling  tide 
of  immigration  to  this  country.  When  the  war  was  over, 
however,  this  tide  again  set  in. 

Labor,  then,  is  one  of  the  primary  productive  elements. 
In  importance  it  is  co-equal  with  land  or  natural  resources. 
The  con-  It  includes  every  phase  of  human  activity  which 
elusion.  directly  or  indirectly  adds  to  the  sum  total  of 
material  wealth  produced  in  the  world.  As  a  factor  of 
production  its  power  may  be  enhanced  by  reason  of  an  im- 
provement in  its  quality  or  by  an  increase  in  its  quantity. 


The  Nature  of  Labor  127 

Only  through  wise  means  of  conservation  and  proper 
methods  of  education  will  the  efficiency  or  quality  of  labor 
be  improved.  On  the  other  hand,  the  quantity  of  labor 
may  be  increased  (1)  through  the  natural  increase  of  popu- 
lation brought  about  by  a  rising  birth  rate  or  a  falling  death 
rate,  and  (2)  through  the  medium  of  immigration  into  the 
country  of  vast  hordes  of  laborers. 

QUESTIONS  FOR  RECITATION 

1.  To  what  extent  is  labor  essential  in  production? 

2.  Explain  the  relative  importance  of  labor  in  the  city  and  in 
the  country. 

3.  Describe  the  part  played  by  labor  in  modern  industry. 

4.  Define  labor.     Give  examples. 

5.  What  is  the  difference  between  the  American  Indian  and  the 
white  man  ?    What  effect  had  this  upon  America  ? 

6.  Explain  the  different  elements  in  labor. 

7.  What  is  the  final  test  of  whether  man's  effort  is  labor  or  not? 
Give  examples. 

8.  Tell  why  the  effort  of  each  of  the  following  is  or  is  not  labor : 
a.  The  physician,  b.  The  stock  broker,  c.  The  card  gambler. 
d.   The  stock  manipulator,     e.   The  philanthropist. 

9.  In  what  two  ways  may  labor's  productivity  be  increased? 

10.  Why  is  efficiency  in  labor  important?    In  what  two  ways 
may  it  be  secured?     Explain  each. 

11.  Why  is  the  number  of  laborers  important?    In  what  two 
ways  may  the  number  be  increased  ? 

12.  Explain  the  natural  increase  of  population.     What  was  the 
Malthusian  law  of  increase  ?    Is  it  operating  in  America  to-day  ? 

13.  Explain  how  the  labor  force  of  a  country  may  be  increased 
from  without. 

PROBLEMS   FOR  DISCUSSION 

1.  Discuss  the  relation  between  the  amount  of  labor  expended 
on  an  article  and  its  selling  price. 

2.  Should  labor  be  the  sole  element  in  determining  the  cost  of 
an  article  ?    Explain  your  position. 


128  American  Economic  Life 

3.  Has  labor  become  more  or  less  important  with  the  develop- 
ment of  machinery  ?    Why  ? 

4.  Does   the   average   street   laborer   work  hard?     Give   your 
reason. 

5.  Of  the  street  laborers  that  you  have  observed,  which  race 
works  hardest  ?    Prove  your  point. 

6.  What    environmental    advantages   have    American   laborers 
over  laborers  in  Europe  ? 

7.  Which  do  you  consider  more  important:    conservation  of 
human  energy  or  conservation  of  natural  resources  ?    Why  ? 

8.  What  conclusions  were  drawn  by  the  classical  economists  from 
their  laws  relating  to  land's  increase  and  labor's  increase  ? 

9.  What  has  interfered  with  the  operation  of  these  laws  in  the 
United  States  ?    What  is  the  result  ? 

10.  May  a  distinction  be  made  between  the  original  labor  force 
of  the  country  and  the  group  of  immigrants  at  present  coming  to 
the  country  ?    Explain  and  give  examples. 

n.   Is  all  effort  labor?    Defend  your  answer. 

12.  What  is  meant  by  "division  of  labor";  "specialization  in 
industry  " ;  "  territorial  division  of  labor  "  ? 

SUPPLEMENTARY  READING 

Carver,  T.  N.    Principles  of  Political  Economy,  Chaps.  VIII,  IX,  X. 

Clay,  H.    Economics,  Chaps.  II  and  III. 

Ely,  R.  T.     Outlines  of  Economics,  Chap.  VIII. 

Gide,  C.    Principles  of  Political  Economy,  pp.  108-124. 

Mill,  J.  S.     Principles  of  Political  Economy,  Book  I,  Chaps.  I  and 

II. 
Seager,  H.  R.    Introduction  to  Economics,  Chap.  VII. 


CHAPTER  XIV 
The  Labor  Force  of  the  United  States 

I.   The  early  settlers 
i.   Their  origin: 

a.  The  New  England  colonists : 
(i)  Their  characteristics 

(2)  Their  similarity 

(3)  Their  occupations 

b.  The  Middle  colonists  : 

(1)  Elements  in  the  population 

(2)  Their  characteristics 

(3)  Why  they  developed  industry 

c.  The  Southern  colonists  : 

(1)  Their  characteristics 

(2)  Why  they  developed  agriculture 

(3)  Why  slavery  nourished 
2.   The  conclusion 

II.   The  later  elements 

1.  From  Northwestern  Europe : 

a.  The  Irish 

b.  The  Germans 

c.  The  Scandinavians 

2.  From  Southeastern  Europe: 

a.  The  Italians 

b.  The  Slavs 

c.  The  Russian  Jews 

d.  Other  groups 

3.  The  resulting  problem 

The  Early  Settlers.  —  Since  the  American  Indian  has 
never  become   a  consistent  industrial  worker,   American 

129 


130  American  Economic  Life 

labor  is  wholly  of  foreign  origin.  From  the  beginning  of 
the  seventeenth  century  until  the  present  time,  America 
has  been  recruiting  its  labor  force  from  various 
parts  of  the  world. 

In  the  early  New  England  colonies  the  Puritan  element 
predominated.  Stern  ideas  of  living,  an  abhorrence  of 
The  New  pleasure,  and  a  strong  sense  of  the  holiness  of 
England  work  characterized  this  group.  The  Puritans 
came  largely  from  the  cities  of  England,  where 
they  were  artisans  and  tradespeople.  Their  religion  gave 
them  deep  convictions  and  high  moral  standards,  and  they 
were  persistent  in  their  efforts  to  achieve  any  end  upon 
which  they  bent  their  energies.  They  adapted  themselves 
easily  to  the  new  surroundings,  forming  a  strong  and 
persistent  type  of  man  and  woman  well  calculated  to  over- 
come the  difficulties  incident  to  the  conquest  of  a  wilder- 
ness. Because  of  their  independence  in  religious  and 
political  matters,  they  developed  into  strong  individualists. 

These  early  immigrants  from  England,  together  with 
those  who  came  later  from  Scandinavia  and  north  central 
Europe,  made  up  a  population  whose  home  institutions 
and  racial  ideals  were  so  nearly  alike  that  there  was  little 
difficulty  in  welding  them  into  a  homogeneous  group. 
Each  new  element  which  arrived  from  Europe  was  readily 
assimilated  and  formed  an  integral  part  of  our  early  popu- 
lation. 

This  New  England  population  very  readily  conquered 
the  adverse  conditions  of  northern  geography  and  climate. 
They  built  ships  because  shipbuilding  materials  and  har- 
bors were  abundant.  They  traded  with  the  West  Indies 
because  the  fish  which  they  caught  all  along  the  coast 
formed  an  exchangeable  commodity  when  salted  and  trans- 


The  Labor  Force  of  the  United  States         131 

ported  into  the  southern  countries.  They  carried  on 
manufacturing  because  the  numerous  rivers  supplied  much 
valuable  water  power.  In  short,  the  New  England  popu- 
lation measured  up  to  the  demands  of  the  new  surroundings 
and  utilized  them  in  a  manner  beneficial  to  the  growing 
nation. 

While  the  people  who  came  to  New  York,  Pennsylvania, 
New  Jersey,  and  Delaware  were  of  a  somewhat  different 
group,  the  basic  elements  of  this  population  were  The  Middle 
the  same  as  those  of  the  New  England  settlers.  colonists- 
The  Quakers  of  Pennsylvania,  New  Jersey,  and  Delaware 
came  largely  from  England.  They  were  joined  by  groups 
of  Germans,  Swedes,  and  Scotch-Irish,  who  settled  on  the 
land,  developed  the  agricultural  resources,  and  paid  some 
attention  to  the  establishment  of  manufacturing.  In 
New  York  the  Dutch  were  the  first  settlers,  but  they  were 
later  reenforced  by  groups  of  English  and  Germans. 

Therefore,  it  may  be  seen  that  the  general  characteristics 
of  the  New  England  settlers  were  distributed  pretty  freely 
throughout  the  Middle  Atlantic  colonists.  The  people  of 
this  group  were  solid,  industrious,  intelligent,  and  God-fear- 
ing. Many  of  the  newcomers  came  to  America  because 
they  believed  in  a  political  or  religious  principle,  and  were 
willing  to  make  sacrifices  for  it.  If  to  these  qualities  are 
added  the  perseverance  and  adaptability  for  which  the 
New  England  colonists  have  also  become  justly  famous,  a 
reasonable  picture  of  this  middle  group  is  presented. 

The  people  of  the  Middle  colonies,  like  those  of  New 
England,  developed  industry  rather  than  agriculture  for 
two  reasons — first,  because  their  agricultural  land  was 
inferior  in  quality  to  that  of  the  South ;  and,  secondly, 
because  the  opportunities  for  developing  industry  were  so 


132  American  Economic  Life 

abundant.  Not  only  could  ships  be  built,  but  fishing  could 
be  carried  on  profitably.  It  was  later  discovered,  too, 
that  the  deposits  of  iron  ore  could  be  worked,  that  hides 
could  be  manufactured,  and  that  the  textile  industry  was 
not  only  possible  but  lucrative. 

In  the  South,  the  character  of  the  early  settlers  was 
somewhat  different  from  that  of  the  Northern  colonists. 
The  South-  The  Southern  colonists  came  to  America  largely 
em  colonists.  from  motives  of  gain.  Here  they  expected  to 
find  gold  and  riches,  and  to  recruit  their  falling  fortunes. 
They  also  came  to  America  to  escape  political  and  religious 
troubles,  for  many  of  them  were  royalists  and  members  of 
the  Established  Church.  They  were  an  aristocratic  and 
pleasure  loving  set,  who  desired  to  begin  life  anew  on  large 
and  fertile  plantations.  Many  representatives  of  the 
gentry  and  middle  class  were  also  among  these  early  colo- 
nists. Since,  however,  hard  physical  labor  had  to  be  per- 
formed by  some  one,  the  upper  classes  imported  to  the  new 
land  many  indentured  servants  and  supported  the  traffic 
in  slaves  which  had  already  been  established. 

In  the  Southern  colonies,  agricultural  land  was  abundant 
and  fertile.  Then,  too,  the  climate  was  suited  to  the  pro- 
duction of  tobacco,  rice,  indigo,  and  cotton.  While  indus- 
trial resources  were  slightly  developed,  the  South  devoted 
a  great  portion  of  its  energy  to  agriculture,  because  from 
that  occupation  the  greatest  gains  could  be  secured.  Then, 
too,  the  land  in  the  North  was  divided  into  small  holdings, 
while  in  the  South  the  land  was  laid  out  in  large  plantations 
worked  by  the  indentured  servants  and  slaves. 

Slavery  did  not  prevail  in  the  North  because  there  was 
no  economic  way  in  which  the  slave  could  be  used.  Slav- 
ery is  desirable  only  when  a  large  number  of  men  can  be 


The  Labor  Force  of  the  United  States  133 

worked  together  under  the  charge  of  an  overseer.  In 
industry  this  is  not  possible.  But  since  it  is  possible  in 
agriculture,  large  groups  of  slaves  were  used  profitably 
throughout  the  South.  Thus  the  labor  force  of  the  North 
was  composed  almost  exclusively  of  people  working  for 
their  own  advancement,  while  that  of  the  South  consisted 
chiefly  of  three  classes,  —  the  landowners,  the  indentured 
servants,  and  the  slaves. 

The  early  population  of  the  United  States  was  drawn 
almost  exclusively  from  Africa  and  northwestern  Europe. 
With  the  exception  of  the  slaves,  nearly  all  of  The  con- 
those  who  came  to  America  were  members  of  clusion- 
one  of  the  Baltic  stocks.  They  had  all  developed  their 
ideas  and  ideals  in  the  same  general  part  of  the  world  and 
along  the  same  general  lines.  In  the  North  these  settlers 
were  therefore  easily  assimilated  and  developed  into  one 
compact  group.  In  the  South,  however,  the  presence  of 
a  body  of  people  who  could  not  assimilate  with  the  whites 
made  the  development  of  a  homogeneous  group  more 
difficult. 

The  Later  Elements.  —  The  nineteenth  century  was 
characterized  by  three  phases  of  immigration.  In  the 
first  place,  the  old  immigration  of  the  eighteenth 

^  .    ,  ■.  t  ,  r   From  north- 

century  was  carried  over  into  the  early  years  of  west 

the  nineteenth  century;  secondly,  there  oc-  Eur°Pe: 
curred  a  great  influx  into  America  of  Irish,  Ger- 
mans, and  Scandinavians  during  the  middle  of  the  nine- 
teenth century ;  and,  thirdly,  after  1880,  a  great  change 
came  over  the  racial  character  of  the  immigrants  to  this 
country.  Just  before  the  middle  of  the  century,  in  1847, 
occurred  the  great  Irish  famine  brought  about  by  the  fail- 
ure of  the  potato  crop.     This  resulted  in  the  immigration 


134  American  Economic  Life 

of  millions  of  Irish  to  America  and  in  the  partial  depopu- 
lation of  the  Emerald  Isle.  As  a  consequence  there  are 
as  many  Irish  in  the  United  States  to-day  as  in  Ireland 
itself.  These  people  have  become  well  assimilated  into 
our  population  and  have  risen,  both  numerically  and  na- 
tionally, to  a  position  of  considerable  importance  in  our 
political  life.  From  an  economic  standpoint,  the  Irish, 
though  sometimes  unsteady,  are  bright,  cheery  laborers  of 
considerable  intelligence  and  natural  capacity.  While 
at  first  they  were  largely  confined  to  the  group  of  unskilled 
workers,  they  later  attained  great  success  in  higher  posi- 
tions of  an  executive  and  professional  character. 

About  the  same  time  that  the  Irish  came  to  this  country 
in  large  numbers,  great  migrations  of  Germans  to  America 
likewise  took  place.  The  year  1848  was  sig- 
nalized by  political  revolutions  throughout 
Europe  and,  in  Germany,  when  they  broke  out,  they  were 
suppressed  with  great  severity.  This  resulted  in  the  exodus 
from  Germany  of  vast  numbers  of  people  who  sought  po- 
litical freedom  in  the  New  World.  As  the  century  wore  on, 
this  tide  of  immigration  became  so  vast  that  over  five 
millions  of  Germans  came  to  this  country.  Because  of 
their  difference  in  language,  these  people  were  sometimes 
not  so  easily  assimilated  into  our  population  as  were  the 
Irish  and  the  English.  In  fact,  during  the  World  War, 
it  was  feared  for  a  time  that  this  group  might  place  alle- 
giance to  their  native  country  above  that  which  they  owed 
to  their  adopted  land.  But,  happily,  events  disproved 
this  position  so  far  as  the  great  body  of  Germans  was 
concerned. 

Scandinavians   from   Norway,    Sweden,    and   Denmark 
also  came  to  America  in  large  numbers  so  that  to-day  there 


The  Labor  Force  of  the  United  States  135 

are  over  a  million  of  these  elements  in  our  population. 
The  Germans  have  settled  not  only  in  large  cities  where 
they  have  become  tradesmen  and  artisans,  but  scandi- 
also  in  agricultural  communities  in  Pennsylvania  navians- 
and  the  Middle  West.  Similarly,  the  Scandinavians  have 
settled  in  agricultural  districts  in  the  great  Northwest, 
where  they  have  engaged  not  only  in  farming,  but  also  in 
the  lumbering  and  transportation  industries.  From  an 
economic  standpoint,  both  the  Germans  and  Scandinavians 
are  steady,  intelligent,  careful,  provident,  and  adaptable 
workers  who  have  often  risen  from  positions  of  minor  im- 
portance to  places  of  great  power  and  influence  in  American 
life. 

Since  1880  the  source  of  immigration  to  this  country 
has  been  gradually  shifting  from  northwestern  Europe  to 
southeastern   Europe.     Besides    the    European  From 
shift,   bringing   Mediterranean  peoples   to   our  j^^Zf? 
land,  a  number  of  French  Canadians  have  also   The 
come  into  New  England.     While,  therefore,  the  Italians- 
Baltic  countries  of  Europe  furnished  the  early  labor  force 
of  America,  the  south  central  and  southeastern  European 
countries  are  responsible  for  most  of  those  migrating    to 
this  country  since  the  closing  decades  of   the  nineteenth 
century.     Foremost    among    these    groups    are    Italians, 
Slavs,   Russian  Jews,   Hungarians,   and  Eastern  peoples. 
The  Italians  migrate  to  this  country  chiefly  for  economic 
reasons.     So  hard  has  the  soil  of  their  native  country  been 
worked,  that  Italians  look  with  longing  eyes  to  America, 
the  land   of   opportunity   and   riches.     Here   they   settle 
largely  in  the  North  and  Middle  Atlantic  states,  showing 
a  frequent  tendency  to  group  themselves  in  the  congested 
districts  of  large  cities.     They  also  settle  in  agricultural 


136  American  Economic  Life 

communities  and  become  small  producers  of  fruits  and 
vegetables.  They  are  frugal  and  industrious  workers, 
but  are  often  handicapped  by  their  ignorance  of  the  English 
language.  They  vary  also  in  disposition,  according  to 
their  southern  or  northern  racial  characteristics. 

The  Slavs  from  the  old  empire  of  Austria-Hungary  con- 
stitute another  new  element  in  our  population.  These 
„  .  people  are  of  various  racial  stocks  and  are  dim- 
and  other  cult  to  assimilate  because  of  language  as  well 
as  racial  differences.  Because  of  their  illiteracy 
they  are  chiefly  unskilled  laborers,  working  in  the  mines 
of  Pennsylvania  and  in  other  industrial  regions.  The 
Russian  Jews  are  naturally  intelligent  and  show  a  re- 
markable ability  for  advancement.  They  settle  largely 
in  cities,  where  they  engage  in  commerce  and  the  trades, 
which  they  prefer  to  agriculture  and  manual  labor.  Their 
family  life  is  strong,  while  their  racial  characteristics  are 
highly  developed.  The  Hungarians,  like  the  Slavs,  settle 
in  mining  districts,  or  in  their  own  little  groups  where  they 
maintain  many  of  their  national  characteristics.  Finally, 
from  the  East  come  Greeks,  Turks,  Armenians,  and  Syrians, 
each  of  whom  adds  his  quota  to  the  development  of  our 
labor  population. 

It  may  thus  be  readily  seen  that,  as  contrasted  with  our 
early  population,  a  vital  change  has  come  over  the  character 
The  of  the  people  migrating  to  America.     Such  a 

resulting  change  is  fraught  with  great  possibilities  for 
good  or  for  evil.  Millions  of  American  wage- 
earners  were  born  abroad  in  lands  whose  economic  and 
political  ideals  are  far  removed  from  our  own,  and  millions 
more  were  born  in  this  country  of  foreign  parentage.  Thus, 
a  large  portion  of  our  labor  force  is  made  up,  not  of  native 


The  Labor  Force  of  the  United  States         137 

Americans,  but  of  foreigners  or  the  children  of  foreigners. 
If  we  are  to  maintain  the  efficiency  of  labor,  the  problem 
which  we  are  now  confronting  is  to  instill  into  this  labor 
population  the  capacity  for  work,  the  power  of  application, 
the  intelligence,  the  energy,  the  perseverance,  and  the 
adaptability  in  developing  natural  resources  which  charac- 
terized the  early  settlers. 

QUESTIONS  FOR  RECITATION 

1.  Why  is  the  labor  force  of  the  United  States  wholly  of  foreign 
origin  ? 

2.  Were  the  early  American  settlers  immigrants?  Explain 
your  answer. 

3.  Contrast  the  original  labor  force  of  New  England  with  that 
of  the  South  in  regard  to : 

a.  Their  industrial  characteristics. 

b.  Their  occupations. 

c.  Their  moral  ideas. 

4.  Describe  the  characteristics  and  occupations  of  the  settlers 
of  the  Middle  colonies. 

5.  Did  the  Middle  group  more  nearly  resemble  the  Northern  or 
Southern  group  ?     Why  ? 

6.  Summarize  the  condition  of  the  labor  force  of  the  United 
States  as  it  existed  at  the  beginning  of  the  nineteenth  century. 

7.  Contrast  that  labor  situation  with  the  conditions  existing  at 
the  opening  of  the  twentieth  century.  What  factors  were  respon- 
sible for  the  change  ? 

8.  What  elements  came  into  our  labor  population  towards  the 
middle  of  the  nineteenth  century  ?    Describe  each  group. 

9.  What  has  been  the  prevailing  character  of  immigration  to  this 
country  since  1880? 

10.  Describe  the  character  of  each  of  the  later  labor  groups  mi- 
grating to  America. 

11.  What  great  problem  has  the  change  in  later  immigration  given 
rise  to  ?    Explain  fully. 


13&  American  Economic  Life 

PROBLEMS  FOR  DISCUSSION 

i.   Show  how  nature  and  man  —  land  and  labor  —  harmonized 
in  the  development  of  North  and  South  in  colonial  days. 

2.  Discuss  the  salient  characteristics  of  the  early  labor  force 
of  this  country. 

3.  Has  the  Anglo-Saxon  race  any  peculiar  economic  character- 
istics ?     Explain  your  answer. 

4.  Upon  what  grounds  do  Anglo-Saxons  base  their  claim  to 
political  leadership  ? 

5.  Explain  the  great  fluctuations  of  the  movement  of  immi- 
grants to  the  United  States  since  1820. 

6.  What  change  in  the  prevailing  character  of  our  immigrants 
has  occurred  within  the  last  generation  ? 

7.  Will  this  recent  immigration  be  of  ultimate  economic  ad- 
vantage to  the  United  States  ?    Why  ? 

8.  What  traits  do  these  immigrants  possess  that  are  not  pos- 
sessed by  native  Americans  ? 

9.  What  steps  should  the  United  States  take  to  Americanize 
immigrants  ? 

10.   Show  how  the  law  of  the  increase  of  population  has  been 
affected  by  immigration. 

SUPPLEMENTARY  READING 

Commons,  J.  R.     Races  and  Immigrants  in  America. 

Fairchild,  H.  P.     Immigration. 

Hall,  P.  F.    Immigration. 

Reports  United  States  Immigration  Commission. 

Riis,  J.  A.     Making  of  an  American. 

Ross,  E.  A.     The  Old  World  in  the  New. 

Steiner,  E.  A.    On  the  Trail  of  the  Immigrant. 

Steiner,  E.  A.     The  Immigrant  Tide. 


CHAPTER  XV 

Economic  Aspects  of  Immigration 

I.   Causes  of  immigration 
i .   The  object  in  view 

2.  Military  and  industrial  reasons : 

a.  The  European  need 

b.  The  American  need 

3.  Political  and  religious  aspect : 

a.  The  early  cause  of  immigration 

b.  How  it  reappears  to-day 

II.   Effects  of  immigration 

1 .  From  a  social  standpoint : 

a.  The  groups  of  immigrants 

b.  The  character  of  the  immigrants : 

(1)  Difference  between  North  and  South  Eu- 
ropean peoples 

(2)  Why  Northern  races  are  preferable 

(3)  A  possible  danger 

(4)  What  the  new  elements  may  bring 

2.  From  an  economic  standpoint : 

a.  The  labor  affected 

b.  Effect  of  immigrant's  standard 

c.  Findings  of  the  commission 

d.  The  restrictions  imposed 

e.  The  conclusion 

Causes   of  Immigration.  —  The  peaceful  migration  of 
great  numbers  of  people  from  one  nation  to  another  is  a 
modern  phase  of  an  old  problem.     In  ancient   object  in 
times,  if  a  land  flowed  with  milk  and  honey,   view- 
kings  led  their  armies  against  it,  enslaved  or  drove  out  the 

139 


140  American  Economic  Life 

inhabitants,  and  took  possession  of  the  fields  and  cattle. 
Under  such  circumstances,  the  movement  of  a  few  thou- 
sand men  from  one  state  to  another  constituted  a  menace 
to  social  welfare.  But,  in  modern  times,  millions  of  per- 
sons move  from  one  nation  to  another  without  attracting 
more  than  passing  notice.  This  movement,  instead  of 
being  warlike,  may  take  the  form  of  a  peaceful  conquest 
of  natural  resources.  However,  it  must  also  be  remem- 
bered that  "  land  "  plays  such  a  mighty  part  in  national 
development  as  to  cause  nations,  in  our  own  day,  to  make 
relentless  war  upon  each  other  for  its  possession  and  utili- 
zation. 

The  governments  of  the  Old  World,  in  order  to  insure  the 
permanence  of  a  large  emergency  army,  wish  to  keep  at 
home   as  many   of   their   subjects   as  possible. 
and  This  necessity  of  military  service  has  been  one 

industrial  0f  ^e  great  causes  of  emigration  from  Europe. 
On  the  other  hand,  in  America  we  do  not  usually 
emphasize  an  increase  in  our  military  forces,  but  we  do 
look  continually  for  an  increase  in  our  industrial  army. 
It  is  upon  industrial  recruits  that  we  depend,  just  as  Euro- 
pean countries  depend  upon  military  organization.  The 
immigration  of  a  group  of  strong,  intelligent  men  and  wo- 
men, therefore,  makes  a  welcome  addition  to  the  ranks  of 
American  labor. 

Religious  and  political  persecution  furnish  another  motive 
for  emigration.     The  best  elements  among  the  early  colo- 
nists left  the  Old  World  because  they  could  not 
and  secure   there   a   reasonable   toleration   of   their 

religious        political   or   religious .  views.     They   were   pro- 
gressive  thinkers,  —  men  who  had  such  great 
faith  in  their  convictions  that  they  were  willing  to  leave 


Economic  Aspects  of  Immigration  141 

their  mother  country  and  make  a  new  home  in  a  new  world. 
A  study  of  recent  immigration  shows  that  some  people, 
notably  the  Jews,  are  still  coming  to  America  for  the  same 
reasons. 

Effects  of  Immigration.  —  In  order  to  understand  clearly 
the  effects  of  immigration  upon  our  institutions,  we  must 
know  first  the  character  of  the  immigrants  who  From  a 
have  come  to  America.     The  three  groups  of  social  stand- 

0        r  point: 

European  races,  —  the  Baltic  or  Northwestern  Groups  of 
races;  the  Alpine  or  Central  European  races;  immigrants. 
and  the  Mediterranean  or  Southern  races,  —  differ  con- 
siderably in  their  so  ial  and  economic  characteristics. 
From  the  Baltic  races  have  come  the  Scandinavians,  the 
Germans,  the  English,  and  allied  groups ;  from  the  Central 
European  races,  the  Slavs,  Russian  Jews,  Austrians,  and 
Hungarians  ;  while  from  the  Mediterranean  countries  have 
come  the  Italians,  the  Greeks,  and  the  Syrians. 

With  the  change  in  the  source  of  immigration  from  the 
northwest  to  the  southeast  of  Europe  there  has  been  a 
corresponding  change  in  the  character  of  the  character  of 
immigrants  themselves.  The  early  Baltic  immi-  immigrants. 
grants  were  more  highly  educated,  more  easily  adaptable 
to  new  surroundings,  and,  in  addition  to  these  two  valuable 
characteristics,  furnished  a  large  number  of  skilled  artisans 
and  mechanics.  In  contrast  with  these,  the  later  Alpine 
and  Mediterranean  immigrants  show  a  high  percentage  of 
illiteracy  and  are  prepared  to  do  little  except  unskilled  work. 

Whether  one  of  these  racial  groups  is  inherently  more 
efficient  than  another  we  are  not  prepared  to  decide.  It 
is  apparent,  however,  that  the  immigrants  of  northern 
Europe  are  more  highly  educated  and  better  adapted  to 
our  standards  than  the  immigrants  of  southern  Europe. 


142  American  Economic  Life 

The  north  Europeans  are  more  in  sympathy  with  our 
political  and  industrial  methods  because  their  institutions 
approximate  more  closely  to  ours  than  do  the  institutions 
of  southern  Europe. 

The  presence  of  a  large  group  of  unassimilated  immi- 
grants, whose  ideals  and  habits  of  thought  are  far  removed 
from  ours,  presents  to  America  the  possibility  of  grave 
danger  in  the  development  of  national  character.  This 
difference  in  attitude  is  not  only  political,  but  also  economic 
and  social,  extending  to  central  as  well  as  to  south  European 
races.  The  World  War  disclosed,  for  a  time,  the  menace 
of  divided  political  allegiance  brought  about  by  difference 
in  national  ideals.  Old  World  political  traditions  are  out 
of  harmony  with  American  ideals,  and  the  United  States 
does  not  need  the  importation  of  any  political  or  economic 
panacea  sprung  from  the  soil  of  oppressed  Europe.  Fur- 
thermore, the  illiteracy,  the  poverty,  and  the  low  economic 
standards  of  southeastern  Europe  must  not  be  reproduced 
in  America.  Hence,  there  arises  in  this  country  the  neces- 
sity for  a  complete  and  thoroughgoing  process  of  Americani- 
zation of  foreign  immigrants  that  must  be  conducted 
through  the  schools,  the  churches,  the  press,  the  public 
forum,  and  the  government  itself. 

On  the  other  hand,  it  is  questionable  whether  the  later 
groups  of  immigrants  are  not  at  times  bringing  to  this 
country  something  which  it  really  needs.  For  example, 
the  Polish  race  is  essentially  musical  and  its  aesthetic  stand- 
ards are  very  high ;  the  Jews  are  highly  intellectual ;  and 
the  Italians  are  bringing  to  America  artistic  ability  of  a 
high  order.  If  these  various  qualities,  which  have  been 
more  highly  developed  in  some  countries  than  in  others, 
can  be  combined  with  the  industrial  efficiency  of  the  Amer- 


Economic  Aspects  of  Immigration  143 

ican,  the  result  may  be  a  race  of  people  more  advanced 
than  the  world  has  ever  known. 

Apart  from  the  racial  contribution  which  the  central 
and  south  European  immigrant  makes  to  this  country, 
what  is  his  effect  upon  the  wage-working  part  From  an 
of  our  population?     Disregarding  the  children  J£5i!Setat: 
of  the  immigrant,  who  enjoy  the  benefit  of  the   The  labor 
public  school  system,  and  considering  only  the  a-ffecied 
untutored  immigrant  himself,  it  is  clear  that  the  mass  of 
immigrants  from  southeastern  Europe  can  have  little  or 
no  economic  effect  except  upon  semi-skilled  and  unskilled 
labor.     This  is  true  because  such  immigrant  labor  is  dis- 
tinctly different  from  that  of  northwestern  Europe.     It  is 
usually  unskilled  in  technical  knowledge,  handicapped  by 
lack  of  education,  and  often  capable  of  performing  only 
the  hardest  kind  of  physical  tasks. 

The  Russian,  Hungarian,  or  Italian  immigrant  has  come 
from  a  country  where  the  standard  of  living  of  the  working 
population  is  low.  To  '  him,  windows  and  E^ect  0j 
doors  are  often  luxuries.  In  some  places  in  immigrant's 
Russia  even  a  wooden  floor  is  considered  a 
luxury.  Consequently,  to  many  of  the  immigrants,  the 
tenement  house  of  our  great  cities  is  a  desirable  home. 
The  immigrant  will  work  for  a  low  wage  because  he  is 
accustomed  to  poor  food  and  a  small  amount  of  clothing. 
The  presence  of  large  numbers  of  immigrants  in  any  com- 
munity will  therefore  result  in  a  temporary  lowering  of  the 
wage  standard.  In  many  localities  this  has  often  happened. 
As  a  result,  it  is  rare  in  those  localities  to  find  American- 
born  persons  working  as  common  laborers,  because,  accus- 
tomed to  a  high  standard  of  living,  they  are  unable  to  exist 
on  the  wage  which  the  immigrant  will  accept. 


144  American  Economic  Life 

The  Immigration  Commission,  appointed  before  the  pas- 
sage of  the  present  immigration  law,  made  its  report  to 
Congress  after  an  extended  inquiry  into  the 
the  Com-  various  sources,  character,  and  effects  of  immi- 
gration during  the  early  part  of  the  twentieth 
century.  It  concluded  that  the  immigration  of  that  time 
was  detrimental  to  the  best  interests  of  the  United  States. 
Modern  immigration,  the  Commission  held,  tends  to  lower 
social  and  industrial  standards.  The  immigrant,  a  low- 
standard  man  in  the  country  from  which  he  comes,  fails 
to  grasp  the  significance  of  the  higher  American  standards. 
He  is  willing  to  live  in  more  congested  quarters,  to  accept 
a  lower  standard  of  diet,  and  to  work  for  less  wages.  The 
American,  accustomed  to  higher  standards,  is  unwilling 
to  come  down  to  the  lower  level.  In  the  competition  which 
follows  he  is  inevitably  beaten,  because  he  must  either 
lose  his  position  or  accept  the  standard  set  by  the  immi- 
grant. 

Accordingly,  Congress  set  itself  to  the  task  of  imposing 
new  restrictions  upon  immigration.  As  far  back  as  1882 
it  had  already  passed  a  Chinese  Exclusion  Act. 
stHctions  This  was  made  necessary  because  of  the  peculiar 
imposed.  racial  social,  and  economic  characteristics  of  the 
Chinese  laborers,  who  completely  crowded  out  American 
labor  in  whatever  competitive  occupations  they  engaged. 
So  low  was  their  standard  of  living  that  no  American  could 
subsist  upon  it.  Later,  during  President  Roosevelt's 
administration,  an  understanding  was  arrived  at  with  the 
Japanese  government  whereby  Japanese  immigration  to 
this  country  was  successfully  restricted.  Then,  too,  Con- 
gress, through  its  immigration  laws,  had  already  excluded 
various  classes  of  undesirable   immigrants,  such  as  anar- 


Economic  Aspects  of  Immigration  145 

chists,  criminals,  paupers,  certain  mental,  moral,  and 
physical  defectives,  and  contract  laborers.  Finally,  in 
order  to  satisfy  the  labor  unions,  Congress,  over  President 
Wilson's  veto,  passed  an  act  imposing  the  literacy  test  on 
all  immigrants.  According  to  this  act,  all  those  who  are 
unable  to  read  or  write  are  excluded  from  our  shores.  How- 
ever, since  there  is  a  real  need  in  America  for  a  group  of 
laborers  who  will  perform  the  hard  unskilled  work  to  which 
the  native  American  is  averse,  it  is  doubtful  whether  this 
test  is  the  best  that  might  be  devised.  It  measures  neither 
native  ability  nor  biological  fitness. 

Whatever  may  be  the  ultimate  effect  of  immigration, 
its  present  influence  is  clear.  In  the  future  the  immigrant, 
or  at  least  his  American-taught  children,  will  The 
doubtless  demand  higher  standards  of  life  and  conclusion. 
work ;  but  when,  in  normal  times,  hundreds  of  thousands 
or  even  a  million  annually  leave  the  poorer  districts  of 
Europe  and  bring  their  low  standards  of  life  to  the  United 
States,  the  American  laborer  is  confronted  by  a  competition 
which  will  ultimately  lower  his  standards  and  compel  him 
to  seek  work  elsewhere.  It  is  evident,  therefore,  that 
from  the  standpoint  of  American  labor,  foreign  immigration 
must  be  so  restricted  and  regulated  that  the  present  stand- 
ard of  living  of  the  native  American  may  be  maintained. 


QUESTIONS  FOR  RECITATION 

1.  Explain  two    different   methods    of  conquest  of  natural  re- 
sources. 

2.  Describe  the  European  impetus  for  emigration. 

3.  Why  does  the  United  States  attract  the  immigrant? 

4.  What  were  the  causes  of  the  early  immigration  to  America? 
Of  the  later  immigration  ? 


146  American  Economic  Life 

5.  Divide  European  peoples  into  groups :  (a)  according  to  terri- 
tory, (b)  according  to  races. 

6.  Show  clearly  the  differences  among  these  groups. 

7.  Which  group  is  more  nearly  like  our  early  American  stock? 
Why  ?    What  is  the  consequence  of  this  ? 

8.  What  groups  are  most  different  from  us?  State  the  reasons 
and  the  consequences. 

9.  What  good  may  result  from  this  admixture  of  races  in  America  ? 
Explain  fully. 

10.  What  great  danger  might  result  ?     Give  examples. 

11.  Outline   a   program   for   the    complete   Americanization   of 
immigrants. 

12.  Explain  clearly  the  chief  economic  effects  of  immigration  upon 
American  labor. 

13.  What  has  been  done  to  protect  American  labor?    Are  these 
restrictions  sufficient  ? 

14.  Contrast   the   American's    and   the    Russian's   standard   of 
living. 

15.  Why  are  special  restrictions  imposed  upon  immigration  from 
the  Orient  ? 

PROBLEMS  FOR  DISCUSSION 

1.  Point  out  the  social  and  economic  effects  of  immigration  in 
the  United  States. 

2.  Would  the  American  labor  force  be  more  efficient  without  the 
immigrant  ?    Why  ? 

3.  How  would  heavy  unskilled  tasks  be  performed  if  the  immi- 
grant were  excluded  ? 

4.  Account  for  the  low  standard  on  which  the  immigrant  is  will- 
ing to  live. 

5.  Will  Greeks,  Italians,  and  Poles  make  good  American  citi- 
zens? 

6.  What  is  the  underlying  reason  for  permitting  immigration 
into  the  United  States  ?    Is  it  justifiable  ?    Explain. 

7.  Name  the  more  important  motives  by  which  persons  are 
(a)  induced  to  leave  the  country  of  their  birth,  (b)  attracted  to 
other  countries. 


Economic  Aspects  of  Immigration  147 

8.  It  is  argued  that  cheap  immigrant  labor  is  like  machinery  — 
an  added  aid  in  production  which  relieves  the  native  laboring  class 
from  heavy  and  disagreeable  toil.     Is  the  analogy  true  ? 

9.  Is  the  manufacturer's  argument  for  cheap  immigrants  valid 
from  the  point  of  view  of  society  in  general  ?     Explain. 

10.  Should  immigration  be  restricted?  If  restrictions  are  im- 
posed, should  they  limit  the  number  of  immigrants,  or  fix  a  test  of 
the  quality  of  immigrants,  or  both  ?    Why  ? 

11.  Would  restriction  of  immigration  be  justified  if  the  conges- 
tion of  immigrants  in  cities  and  along  the  seaboard  could  be  pre- 
vented, and  the  foreign  elements  distributed  over  the  whole  coun- 
try ?    Explain. 

12.  State  the  arguments  for  and  against  immigration. 

SUPPLEMENTARY  READING 

Antin,  Mary.     The  Promised  Land. 
Brandenburg,  B.     Imported  Americans. 
Coolidge,  M.  R.     Chinese  Immigration. 
Hourwich,  I.  A.    Immigration  and  Labor. 
Kawakami,  K.  K.    Asia  at  the  Door. 
Steiner,  E.  A.    From  Alien  to  Citizen. 
Warne,  F.  J.     The  Immigrant  Invasion. 
Zangwill,  I.     The  Melting  Pot. 


CHAPTER  XVI 

The  Risks  of  Labor 

I.   Industrial  accidents 
i .    Kinds  of  accidents  : 

a.  Railroad  accidents : 
(i)  The  causes 

(2)  The  remedy 

b.  Mining  accidents : 

(1)  The  situation  abroad 

(2)  The  remedy 

c.  Other  accidents 

2.  Total  annual  number 

3.  The  labor  affected 

4.  Effects  of  accidents 

II.   Dangerous  trades 

1.  Chief  source  of  danger 

2 .  Danger  from  coal  dust : 

a.  Character  of  the  lungs 

b.  Effect  on  the  lungs 

c.  How  preventable 

3.  Danger  from  lead  poisoning : 

a.  Its  effects 

b.  How  preventable 

4.  Other  dangerous  trades 

5.  Recent  progress 

The  risks  to  which  labor  is  subjected  in  modern  industry 
may  be  grouped  under  two  heads ;  first,  those  involved  in 
industrial  accidents,  and  secondly,  those  arising  from  dan- 
gerous trades  and  occupations. 

148 


The  Risks  of  Labor  149 

Industrial  Accidents.  —  Industrial  accidents  include  those 
catastrophes    which    either    temporarily    or    permanently 
destroy  the  efficiency  of  the  wage-earner.     They 
may  be  classified  according  to  occupation ;    as         s  °  : 
railroad,    mining,    factory,    and    building    accidents.     Of 
these,  the  first  two  constitute  by  far  the  greater  number. 

The  material  regarding  railroad  accidents  is  compiled 
by  the  Interstate  Commerce  Commission  and  is  furnished 
by  the  railroads  as  part  of  their  reports  to  Railroad 
the  Commission.  No  other  American  accident  acctdenis- 
statistics  are  collected  with  such  careful  accuracy.  A 
study  of  these  statistics  for  the  present  century  shows  a 
steady  increase  in  the  number  of  such  accidents.  In  one 
year  alone  10,000  persons  were  killed  and  100,000  injured 
in  railway  accidents  (1907).  Railroad  casualties  are  not 
only  appalling  in  number,  but  increasing  in  frequency. 
That  there  is  no  justification  whatsoever  for  this  increase 
is  proved  by  conditions  in  foreign  countries,  where  the 
infrequency  of  railroad  accidents  is  in  marked  contrast 
to  our  own  waste  of  human  life.  The  causes  of  this  waste 
of  life  through  railroad  accidents  are  found  both  in  indi- 
vidual action  and  in  corporate  management.  So  long  as 
individuals  are  careless,  accidents  will  occur ;  and  so  long 
as  corporations  fail  to  supply  devices  for  the  safety  of  their 
employees  and  passengers,  the  same  result  will  follow. 

A  remarkable  proof  of  the  fact  that  working  conditions 
are  largely  responsible  for  these  accidents  is  furnished  by 
the  beneficial  effect  of  the  federal  law  requiring  automatic 
couplers.  The  passage  of  this  act  was  followed  by  a  reduc- 
tion in  the  number  of  coupling  accidents  from  forty-four 
per  cent  of  the  total  number  of  casualties  among  trainmen 
to  nine  per  cent;    although,  at  the  same  time,  the  total 


150  American  Economic  Life 

number  of  all  railroad  casualties  was  steadily  increasing. 
Equally  effective  results  would  doubtless  be  secured  by 
other  forms  of  federal  regulation  concerning  the  length  of 
runs,  the  character  of  signals,  and  similar  protective  meas- 
ures. Railway  accidents  are  enormous  in  number;  but, 
by  wise  precaution  and  stringent  legislation,  they  can  be 
largely  eliminated. 

Accidents  in  coal  mines  are  the  most  common  of  the  min- 
ing accidents.  The  record  of  coal  mine  accidents  in  the 
Mining  United  States  is  unsatisfactory  because  it  con- 
acadents.  sists  mereiy  0f  a  collection  of  the  reports  of  state 
mine  inspectors  whose  work  is  not  so  careful  as  that  of 
federal  officials.  However,  it  was  shown  that  in  a  single 
year  (1908)  2500  miners  were  killed  and  6500  injured. 
From  a  comprehensive  study  of  all  the  statistics  available, 
it  is  fair  to  conclude  that  there  has  been  a  steady  increase 
from  year  to  year,  not  only  in  the  actual,  but  also  in  the 
proportional,  number  of  men  killed  in  mining  accidents. 
This  increase  cannot  be  accounted  for  merely  by  the  growth 
of  the  mining  industry.  A  recent  bulletin  on  coal  mine 
accidents  dealing  with  conditions  abroad  before  the  World 
War  proves  this  conclusively.  It  states :  "  In  all  the 
European  coal-producing  countries  the  output  of  coal  has 
increased  greatly  during  the  last  ten  years,  but  the  number 
of  deaths  per  one  thousand  miners,  instead  of  increasing 
as  in  this  country,  has  undergone  a  marked  and  decided 
decrease.  This  decrease  has  been  due  to  the  effect  of  min- 
ing legislation  in  those  countries  for  the  safeguarding  and 
protection  of  the  lives  of  the  workmen,  and  has  been  made 
possible  by  government  action  in  establishing  testing  sta- 
tions for  the  study  of  problems  relative  to  safety  in  mining, 
including  the  use  of  explosives." 


The  Risks  of  Labor  151 

The  success  of  foreign  governments  in  preventing  mining 
accidents  has  been  due  primarily  to  their  rules  concerning 
the  use  of  safety  lamps  and  to  their  regulation  of  the  charac- 
ter and  use  of  mine  explosives.  Nothing  could  be  more 
elementary  or  simple,  and  yet  the  United  States  has  made 
but  little  effort  to  meet  the  problem  in  this  way.  It  should 
be  remembered,  however,  that  the  problem  here,  by  reason 
of  the  dual  character  of  our  governmental  system,  is  more 
complicated  than  the  situation  abroad. 

Turning  now  to  accidents  in  manufacturing,  we  find  that, 
because  of  lack  of  uniformity  in  the  work  of  state  factory 
inspectors,  it  is  impossible  to  determine  accu-  other 
rately  the  total  number  of  such  accidents.  How-  accidents- 
ever,  the  best  statistics  of  factory  accidents  have  been 
compiled  from  the  reports  of  the  New  York  Bureau  of 
Labor  Statistics.  If  we  take  five  typical  years  at  the 
opening  of  the  present  century,  we  find  that,  in  that  state, 
39,244  such  accidents  were  reported.  Of  this  number, 
864  were  fatal ;  6580  involved  permanent  disability ;  and 
32,722,  temporary  disability.  The  accidents  in  building 
trades  have  never  been  recorded  except  in  fragmentary 
form.  It  is  therefore  impossible  to  state  anything  definite 
regarding  them.  The  only  accurate  information  that 
can  be  secured  comes  from  the  unions  which  pay  benefits. 
The  accident  features  of  these  unions  furnish  material 
from  which  may  be  made  an  estimate  of  the  number  of 
union  men  killed  and  injured  in  each  trade. 

It  is  clear,  however,  from  a  study  of  all  the  available 
sources  of  information,  that  the  total  loss  to  the  Total 
community,  caused  by  accidents  of  one  kind  or  annual 
another,  is  enormous.     An  estimate  of  this  loss 
places  the  total  number  of  men,  women,  and   children 


152  American  Economic  Life 

killed  and  injured  each  year  through  industrial  accidents 
at  five  hundred  thousand.  This  figure  is  as  nearly  accurate 
as  possible,  for  it  has  been  arrived  at  by  five  different 
methods  of  computation. 

It  is  not  true,  as  it  is  currently  supposed,  that  these 
accidents  happen  only  to  the  careless,  unskilled  laborer, 
The  labor  the  immigrant,  and  the  American  of  low  stand- 
affected.  ar(j  ^ot  only  is  the  semi-skilled  trainman  a 
victim  of  the  railroad  accident,  but  also  the  conductor  and 
the  skilled  engineer.  A  Pittsburgh  investigation  shows  that 
of  440  men  killed  only  forty  per  cent  were  lowest  grade 
workmen.  Thus  the  social  cost  of  accidents  is  intensified 
by  the  fact  that  efficient  as  well  as  inefficient  workmen  are 
victimized. 

The  burden  of  accidents  falls  on  the  family  and  on  the 
community.  The  accident  destroys  the  worker.  The 
Effects  of  worker  is  the  mainstay  of  the  family,  which  is 
accidents.  itself  the  basis  of  the  community.  Although 
children  and  old  people  may  escape  industrial  accidents, 
the  breadwinners  upon  whom  they  depend  for  subsistence 
are  struck  down  at  the  rate  of  a  half  million  every  year. 
Industrial  accidents,  therefore,  constitute  one  of  the  causes 
of  industrial  inefficiency.  Of  the  half  million  persons 
annually  killed  and  injured,  the  majority  are  wage-earners 
with  families  depending  upon  them.  Their  death  or 
injury,  therefore,  affects  the  efficiency  of  the  coming 
generation. 

Dangerous  Trades.  —  Another  danger  to  which  labor 
is  subjected  results  from  the  nature  of  the  occupation. 
While,  fortunately,  not  numerous,  certain  trades  do  exist 
where  the  death  rate  is  several  times  higher  than  the  death 
rate  in  the  community  at  large.     When  a  workingman 


The  Risks  of  Labor  153 

enters  such  a  trade  and  accepts  such  work,  he  takes  his  own 
life  in  his  hands. 

The  chief  source  of  danger  in  these  occupations  arises 
from  the  presence  of  dust,  which,  entering  the  system 
through  the  lungs  or  alimentary  canal,  proves  chief  source 
injurious  to  the  worker.  Dust  may  also  irri-  ofdanger. 
tate  the  skin,  but  its  effects  here,  except  in  the  cases  of 
antimony  smelters  and  arsenic  grinders,  are  usually  not 
serious.  In  cases  where  dust  enters  the  alimentary  canal, 
stomach  and  intestinal  troubles  result;  when  it  enters 
the  lungs,  tuberculosis  develops. 

Thomas  Oliver,  in  his  Dangerous  Trades,  says,  "  Were 
it  not  for  dust,  fumes,  or  gas,  there  would  be  little  or  no 
disease  due  to  occupation,  except  such  as  might  Dangerfrom 
be  caused  by  infection,  the  breathing  of  air  coaldust: 
poisoned  by  the  emanations  of  fellow-workmen,  and  ex- 
posure to  cold  after  working  in  overheated  rooms."  Dust, 
then,  is  the  most  prevalent  source  of  danger ;  and  its  most 
injurious  effect  is  on  the  lungs. 

The  normal  lung  is  a  light,  spongy  mass,  interwoven 
with  minute  bronchial  tubes.  Nature  planned  to  exclude 
foreign  substances  from  these  tubes  by  placing  character  of 
hair  in  the  nose  and  by  guarding  the  whole  pas-  the  lungs- 
sage  way  with  the  vocal  cords  and  the  cartilage  plates. 
These  devices  prevent  any  ordinary  amount  of  dust  from 
reaching  the  lungs.  But,  in  coal  mines,  there  is  more 
than  an  ordinary  amount.  A  visitor,  long  after  leaving 
a  breaker  in  which  coal  is  cleaned  dry,  will  continue  to 
expectorate  dust  or  coal  particles  which  have  been  arrested 
in  the  larger  passages.  A  long  exposure  to  dust,  however, 
dulls  the  sensibility  of  the  membranes;  efforts  are  no 
longer  made  to  expectorate  the  dust,  and  the  particles 


154  American  Economic  Life 

enter  the  small  tubes  of  the  lungs  and  become  embedded 
in  the  lung  tissue. 

Again,  Thomas  Oliver  says,  "In  a  coal  miner's  lung 
there  can  be  observed  small  masses  of  cells,  deeply  laden 
Effect  on  with  carbon  particles  surrounded  by  a  hardened 
the  lungs.  zone  0f  a^ered  lung,  numerous  black  streaks 
underneath  the  pleura  or  covering  of  the  lungs,  inklike 
dots  in  the  walls  of  the  small  bronchi,  and  enlargement 
with  pigmentation  of  the  bronchial  glands.''  The  entrance 
of  dust  into  the  lung  finally  converts  it  into  "  a  hard  and 
almost  solid  organ,  incapable  of  carrying  on  the  work  of 
respiration." 

A  similar  effect  is  produced  by  other  forms  of  dust. 
Examinations  show  particles  of  grit  embodied  in  the  tissue 
How  pre-  corresponding  exactly  to  the  dust  grit  of  the 
ventabie.  trade  in  which  the  victim  worked.  Therefore, 
the  man  who  goes  to  work  in  a  dusty  trade  prepares  his 
lungs  for  a  cordial  reception  to  tuberculosis,  or  any  other 
bacteria  which  attack  weakened  lung  tissue.  However, 
much  can  be  done  in  the  way  of  precaution  and  prevention. 
By  screening  the  coal  wet,  the  dust  in  the  coal  breaker  may 
be  reduced;  and,  by  the  use  of  suction  wheels,  blowers, 
and  other  mechanical  devices,  the  dust  in  the  factories 
may  be  rendered  less  dangerous. 

There  are  other  occupations  besides  mining  that  are  full 

of  risk  and  danger.     Certain  substances  used  in  industry 

are  always  injurious  to  life  and  health.     Among 

lead  these  substances  none  is  more  widely  used,  nor 

poisoning:     more  reaUy  dangerous,  than  lead  in  its  various 

Its  effects.  *  *f  , 

forms.  Lead  poisoning  occurs  in  several  trades, 
although  it  is  most  severely  felt  in  the  manufacture  of 
white  lead.    Poisoning  from  lead  may  be  acute  or  chronic. 


The  Risks  of  Labor  155 

The  symptoms  of  both  forms  are  colic,  "  wrist  drop,"  loose 
teeth,  and  blue  lines  on  the  gums. 

Ventilation,  an  abundance  of  nutritious  food,  abstinence 
from  all  excess,  especially  alcoholic,  the  use  of  special  hel- 
mets, together  with  short  hours  in  the  factory,  How  pre. 
all  assist  in  decreasing  the  dangers  from  lead  ventable- 
poisoning.  There  is  no  other  industry  in  which  the  dan- 
gers are  more  acute,  and  where  the  necessity  for  precaution 
and  preventive  measures  should  be  more  emphasized. 

The  production  of  phosphorus,  mercury,  and  arsenic; 
the  chemical  trades ;    rag  sorting ;    wool  sorting ;    work  in 
compressed  air  chambers,  —  all  involve  dangers 
of  varying  degree.     The  reference  to  mining  and  dangerous 
the  lead  industry  will,  however,  suffice  to  indicate  tra  es' 
the  character  of  dangerous  trades,  their  effects,  and  the 
possibility  of   remedying   them   through   wise  preventive 
measures. 

The  recent  progress  made  by  the  United  States  in  the 
direction  of  social  legislation  is  attested  by  the  act  of  Con- 
gress which,  in  191 3,  prohibited  the  use  of  poi-  Recent 
sonous  phosphorus  in  the  manufacture  of  progress- 
matches.  The  awakening  of  the  public  conscience  was  so 
general  that,  within  three  years,  twenty-three  states 
passed  accident  insurance  laws  or  workmen's  compensation 
acts.  The  act  of  Congress  prohibiting  the  use  of  poisonous 
phosphorus  in  the  manufacture  of  matches  resulted  in 
fifteen  states  adopting  the  bill  of  the  American  Association 
for  Labor  Legislation  for  protecting  workers  from  several 
occupational  diseases,  and  from  lead  poisoning  in  particular. 
Foremost  among  the  general  measures  designed  to  relieve 
the  distress  caused  by  industrial  accidents  and  dangerous 
trades  is  the  Workmen's  Compensation  Act.     This  measure 


156  American  Economic  Life 

is  intended  to  furnish  the  injured  worker  automatically  with 
the  compensation  specified  in  the  act,  and  thus  relieve  him 
of  the  necessity  of  legal  procedure  with  all  the  costs  included 
in  such  action.  Likewise,  accident  insurance  and  old  age 
pension  acts  are  coming  to  play  an  important  part  in  our 
solution  of  this  problem.  In  1908  Congress  enacted  a 
law  providing  a  system  of  compensation  for  accidents 
suffered  by  industrial  employees  of  the  Federal  government. 
The  example  set  by  the  national  government  was  followed 
by  the  state  governments,  so  that  by  1914  a  majority  of 
the  state  legislatures  had  enacted  laws  providing  compensa- 
tion for  industrial  accidents. 

QUESTIONS  FOR  RECITATION 

1.  Define  industrial  accidents ;  dangerous  trades. 

2.  Classify  the  chief  industrial  accidents  in  the  order  of  their 
importance. 

3.  Which   group   is   best   studied?      Why?      Why   cannot  the 
other  groups  be  so  effectively  investigated  ? 

4.  Discuss  the  causes  and  remedies  of  railroad  accidents. 

5.  Compare  mining  accidents  at  home  and  abroad.     How  may 
they  be  lessened  ? 

6.  Give  an  estimate  of  the  total  annual  number  of  accidents  in  the 
United  States. 

7.  Who  suffer  most  from  accidents  ? 

8.  Name  the  chief  dangerous  trades  and  tell  why  each  is  dan- 
gerous. 

9.  Why  is  dust  so  dangerous  ? 

10.  In  regard  to  mining : 

a.  Explain  its  dangerous  consequences. 

b.  Discuss  the  remedies. 

11.  Discuss  lead  poisoning  : 

a.  How  it  affects  the  system. 

b.  How  it  may  be  obviated. 

12.  Name  some  other  dangerous  trades. 


The  Risks  of  Labor  157 

13.  Why  has  the  United  States  abolished  the  use  of  poisonous 
phosphorus  in  match  making? 

14.  Describe  the  recent  progress '  made  in  social  legislation  in  the 
United  States. 

PROBLEMS   FOR  DISCUSSION 

1 .  Are  industrial  accidents  inevitable  ? 

2.  In  a  case  where  persons  are  killed  and  injured  in  a  wreck  due 
primarily  to  a  defective  air  brake,  what  should  be  the  legal  remedy? 

3.  To  what  extent  is  the  community  at  large  responsible  for 
accidents  ? 

4.  Where  does  the  ultimate  burden  of  industrial  accidents  rest  ? 
Explain. 

5.  Should  a  manufacturer  be  held  personally  responsible  for  an 
accident  due  to  unguarded  machinery  ? 

6.  What  would  be   the  most   effective  method  of  preventing 
accidents  ? 

7.  Discuss  workmen's  compensation  acts  as  remedies. 

8.  Analyze  the  street  accidents  of  your  city,  and  develop  a  means 
of  prevention. 

9.  Discuss  the  dangerous  trades  in  your  community. 
10.   Why  is  lead  poisoning  particularly  disastrous? 

n.  What  remedies  exist  for  the  dangers  involved  in  dangerous 
trades  ? 

12.  Are  consumers  justified  in  using  the  products  of  such  trades? 
State  reasons. 

SUPPLEMENTARY  READING 

Adams,  T.  S.,  and  Sumner,  H.  L.    Labor  Problems. 

Bulletins  of  United  States  Bureau  of  Labor  Statistics,  Nos.  101- 

109,  126,  and  155. 
Kelley,  F.    Some  Ethical  Gains  through  Legislation. 
Oliver,  T.     Dangerous  Trades. 
Oliver,  T.     Diseases  of  Occupation. 
Reports  of  State  Bureaus  of  Labor  Statistics. 
Rubinow,  I.  M.     Social  Insurance. 
Seager,  H.  R.     Social  Insurance,  Chaps.  II-III. 


CHAPTER  XVII 

Problems  of  Industry 

I.   Child  labor 

i.    Its  English  origin 

2.  Its  extent  in  America 

3.  Its  evil  effects  : 

a.  On  the  child : 

(1)  Physically 

(2)  Mentally 

(3)  Morally 

b.  On  family  life 

c.  On  society 

d.  On  the  product 

4.  Its  regulation 

II.   Women  in  industry 

1 .  The  causes  : 

a.  Minute  subdivision  of  labor 

b.  Acceptance  of  lower  wages 

c.  Loss  of  home  employment 

2.  Arguments  against 

3.  Arguments  in  favor  of 

4.  Regulation  of  the  problem 

III.   Unemployment 

1 .  Causes : 

a.  Personal  causes 

b.  Industrial  causes 

2.  Effects: 

a.  On  the  unemployed 

b.  On  the  family 

3.  The  remedy 

158 


Problems  of  Industry  159 

Of  the  problems  arising  from  modern  industry,  three 
are  of  recurring  interest.  These  are  the  problems  of  child 
labor,  women  in  industry,  and  unemployment. 

Child  Labor.  —  The  problem  of  child  labor  had  its  real 
origin  in  England  in  the  last  half  of  the  eighteenth  century 
when  the  factory  system  was  first  being  de-  its  English 
veloped.  Manufacturers  were  in  great  need  of  orisin- 
unskilled  labor  to  operate  the  new  machinery,  while  poor- 
houses  and  orphan  asylums  were  overcrowded  with  just 
this  kind  of  labor.  As  a  result,  these  institutions  gave 
up  their  children  to  the  manufacturers,  who  in  certain 
cases  even  agreed  to  take  one  insane  child  with  every 
twenty  healthy  ones.  The  children  were  quartered  in 
barracks  and  worked  in  day  and  night  shifts,  the  day 
shifts  sleeping  in  the  beds  left  vacant  by  the  night  workers. 
No  provision  was  made  for  sanitation,  and  the  children 
were  fed  on  the  worst  kind  of  food.  These  conditions, 
culminating  in  an  outbreak  of  disease  and  epidemics, 
resulted  at  the  opening  of  the  nineteenth  century  in  the 
passage  of  an  act  for  the  regulation  of  the  health  and  morals 
of  apprentices.  Then,  in  1833,  and  later  in  1847,  much 
more  comprehensive  and  effective  laws  regulating  the  labor 
of  women  and  children  in  industry  were  passed.  In 
our  own  day  the  English  government  has  completed  its 
supervision  over  industry  and  has  passed  much  important 
social  legislation. 

Child  labor  in  the  United  States  is  thus  a  recurrence  of 
an  Old  World  phenomenon.     At  first,  it  appeared  in  New 
England,  where  industry  was  early  developed,  its  extent 
but  since  the  close  of  the  Civil  War,  the  South  in  America, 
has  entered  upon  an  era  of  industrial  development,  and 
thus  the  old  problem  of  child  labor  reappears  there  to-day. 


160  American  Economic  Life 

Again,  in  the  industrial  sections  of  the  Middle  West,  and 
in  the  great  agricultural  West,  thousands  of  children  under 
fourteen  years  of  age  are  engaged  in  industrial  and  agri- 
cultural work.  A  few  years  ago  it  was  estimated  that 
of  the  two  million  children  employed  in  gainful  occupa- 
tions, three-fifths  of  them  were  engaged  in  agriculture,  one- 
sixth  in  manufacturing,  one-sixth  in  domestic  work,  and 
the  remainder  in  commercial  and  professional  service.  The 
largest  number  of  children  are,  therefore,  employed  in 
agriculture;  but  child  labor  is  usually  associated  with 
manufacturing,  for  it  is  here  that  its  worst  evils  are  mani- 
fested. 

There  is  no  doubt  about  the  evil  consequences  of  em- 
ploying children  in  industry.  From  whatever  stand- 
Effects:  point  the  problem  is  regarded,  child  labor  is  in- 
On  the  jurious.     It  is  harmful  to  the  child,  to  family 

child.  j-£e^  tQ  S0CjetVj  and  to  the  industrial  product. 

On  the  physical  side,  hard  labor  is  injurious  to  young  chil- 
dren because  their  bodies  are  still  developing.  Through 
activity  the  body  of  the  growing  child  is  developed  most 
surely  and  most  completely.  The  originalities  of  a  child 
arise  through  action,  struggle,  and  the  trial  of  things  for 
himself.  But  the  child  of  twelve  or  fourteen  who  stands 
at  the  machine  tying  threads  for  eleven  hours  a  day  is 
not  growing  through  expression.  He  is  being  narrowed 
by  an  unvarying,  monotonous  impression.  He  is  losing 
the  opportunity  for  the  spontaneous  expression  of  the  new 
life  that  comes  only  through  play. 

From  a  mental  standpoint,  child  labor  is  a  process  of 
mind-stunting.  First,  the  child  is  removed  from  the 
possibility  of  an  education.  He  is  taken  from  the  school 
and  placed   in   the   factory,  where  he  no  longer  has  an 


Problems  of  Industry  161 

opportunity  to  learn.  Then  he  is  subjected  to  monotonous 
toil  for  long  hours,  until  his  mind  is  dwarfed  into  the 
familiar  form  of  the  unskilled  workman. 

The  moral  effects  of  child  labor  are  also  bad.  Entering 
the  workroom  with  adults  of  all  types  of  morality  and 
immorality,  the  child  ceases  to  be  a  child  in  matters  of 
worldly  knowledge,  while  he  is  still  a  child  in  ideas.  There 
is  no  home  influence  or  school  influence  to  ward  off  the 
dangers;  no  mother  or  teacher  to  point  out  the  hidden 
rocks. 

The  effects  of  child  labor  on  family  life  are  obvious. 
In  many  localities  in  the  South,  where  industry  is  develop- 
ing for  the  first  time,  the  children  work  in  the    va  , 

&  '  Effect  on 

mill  with  their  parents.  If  either  parent  stays  family 
home,  it  is  frequently  the  father.  Under  these 
circumstances,  the  mother  has  no  opportunity  at  home  to 
maintain  family  standards.  Neither  in  their  parents, 
nor  in  their  homes,  do  the  working  children  see  those 
qualities  which  make  the  home  the  ideal  of  human  happi- 
ness. 

It  is  equally  clear  that  child  labor  injures  society.  By 
making  of  the  boy  an  unskilled  worker  incapable  of  earning 
large  wages,  and  by  making  of  the  girl  a  woman  ESeci  on 
incapable  of  becoming  a  strong,  normal  mother,  society- 
child  labor  inevitably  tends  to  undermine  social  life.  Be- 
cause the  boy  is  forced  into  the  world  too  early  in  life  and 
made  to  face  its  responsibilities,  child  labor  promotes 
delinquency.  The  inmates  of  houses  of  correction  were 
usually  working  boys  when  they  were  first  arrested.  The 
schoolboy  is  almost  a  negligible  factor  there.  Both  family 
and  individual  life  are  distorted  by  child  labor. 

Finally,    child   labor   affects   the  product  of   industry. 


1 62  American  Economic  Life 

The  treasurer  of  the  Alabama  City  Cotton  Mill  wrote  to 
his  agent :  "  Every  time  I  visit  this  mill,  I  am  impressed 
Effect  on  with  the  fact  that  it  is  a  great  mistake  to  employ 
the  product.  small  help  m  tne  spinning  room.  Not  only 
is  it  wrong  from  a  humanitarian  standpoint,  but  it  entails 
an  absolute  loss  to  the  mill."  Child  labor  is  thus  waste- 
ful to  industry.  Manufacturers  everywhere  are  being 
forced  to  this  viewpoint.  Child  labor  is  undoubtedly 
cheap  labor,  but  the  product  is  cheaper  than  the  labor 
involved  in  its  creation. 

Consequently,  from  every  standpoint,  child  labor  is 
undesirable.  It  decreases  individual  and  social  welfare 
Re  ulation  anc^  l°wers  the  standards  of  the  future  citizen, 
of  child  as  well  as  the  industrial  standards  of  society.  In 
view  of  these  disastrous  effects,  numerous  laws 
have  been  passed  which  aim  to  exclude  from  work  children 
under  fourteen,  and  to  safeguard  the  working  lives  of  chil- 
dren from  fourteen  to  sixteen  years  of  age.  In  recent 
years  the  public  conscience  has  been  so  aroused  in  this 
direction  that,  in  one  year  alone  (1913),  thirty-one  states 
enacted  legislation  directly  bearing  upon  child  labor ;  and 
the  national  government  itself  established  a  Federal 
Bureau  of  Child  Labor. 

Women  in  Industry.  —  Another  problem  of  growing 
importance  is  that  of  women  in  industry.  A  half  century 
ago  women  played  an  insignificant  role  in  indus- 
trial life ;  to-day  there  is  not  an  important  branch 
of  industry  where  she  is  not  found.  The  World  War,  by 
withdrawing  millions  of  men  from  industry,  resulted  in  the 
entrance  of  millions  of  women  into  the  places  made  vacant 
by  the  exigencies  of  war.  But,  even  in  normal  times, 
women  are  assured  a  place  in  industry,  because  that  place 


Problems  of  Industry  163 

has  already  been  established  in  modern  industrial  life. 
War  merely  served  to  accentuate  the  importance  of  women 
as  workers. 

The  causes  of  this  advent  of  women  into  industry  are 
obvious.     First  of  all,   the  minute   subdivision  of  labor 
has  given  rise  to  such  a  degree  of  specialization  Minute 
in  industry  that  there  are   innumerable   small  subdivision 
operations  that  women  can  easily  perform.     For 
example,  a  girl  may  paste  corners  on  paper  boxes,  or  stamp 
out  pieces  of  paper  to  make  Christmas  cards.     Without 
previous  training,  she  will,  in  a  short  time,  learn  to  manage 
a  machine.     At  first  her  efficiency  will  not  be  high,  but  she 
will  earn  at  least  enough  to  assure  her  future  independence. 

Women,  having  only  themselves  to  support,  are  willing 
to  accept  a  much  lower  wage  than  men.  Therefore,  when 
they  enter  industries  in  competition  with  men,  Lower 
the  latter  are  frequently  forced  out  altogether.  wases- 
For  example,  men  formerly  rolled  cigars  for  a  wage  sufficient 
to  support  themselves  and  their  families.  Now  the  same 
labor  is  performed  by  girls  at  a  much  lower  rate. 

The    most    potent    cause    of     woman's    entering    in- 
dustry, however,  is  found  in  her  loss  of   home   employ- 
ment.    Formerly,  women  had  so  much  to  do  at   .       , 
home  that  their  time  was  fully  occupied.     Spin-  home  em- 
ning,  weaving,  the  manufacture  of  clothing,  and     °ymi 
the  preparation  of  foodstuffs,  all  engaged  their  attention. 
But  the  seat  of  these  operations  has  now  been  removed  to 
the  factory.     Comparatively  little  sewing  is  now  done  in 
the  home,  and  the  cooking  is  decreasing  rapidly.     Cleaning 
is  the  only  part  of  "  woman's  sphere  "  left  her ;  it  is  small 
wonder,  then,  that  she  goes  to  the  factory  to  escape  this 
drudgery. 


164  American  Economic  Life 

As  to  the  advisability  of  woman's  entering  industry 
opinion  is  divided.  Those  who  are  opposed  to  this  tendency 
Arguments  point  out  that  the  chief  function  of  woman  is  to 
against.  ^e  a  home  maker  and  to  bring  up  her  children 
properly ;  that  this  work  still  engages  enough  of  her  time 
to  prevent  her  from  undertaking  outside  employment; 
that  factory  labor  injures  women,  and  through  them, 
their  offspring;  and  that,  finally,  the  presence  of  women 
in  industry  cuts  down  the  wages  of  men. 

On  the  other  hand,  those  who  are  in  favor  of  this  tendency 
make  the  following  arguments :  (1)  that,  because  of  the 
Arguments  development  of  the  factory  system,  there  is  com- 
m  favor  of.  paratively  little  left  for  women  to  do  at  home ; 
(2)  that,  because  skill  and  dexterity  are  chiefly  required, 
labor  is  not  injurious  to  women  physically;  (3)  that,  by 
entering  industry,  women  are  made  independent  and  equal 
to  men  so  that  they  need  not  be  forced  into  unhappy 
marriages ;  and  (4)  that  it  is  not  fair  to  force  upon  woman 
the  drudgery  of  cleaning  and  cooking  which  constitute 
so  large  a  part  of  the  regular  work  of  the  household. 

However,  no  matter  how  divided  opinion  may  be  regard- 
ing the  advisability  of  women  entering  industry,  there  can 
R  .  .  be  little  doubt  concerning  the  necessity  of  regu- 
of  the  lating  their  labor.     Woman,  like  every  new  ele- 

ment in  industry,  is  easily  susceptible  of  exploi- 
tation at  the  hands  of  the  unscrupulous  employer.  Her 
necessity,  her  willingness,  and  her  first  contact  with  the 
problem,  all  combine  to  necessitate  some  form  of  pro- 
tection. As  a  result,  the  states  have  passed  numerous 
laws  restricting  the  hours  of  labor,  the  conditions  of  work- 
ing, and  the  night  work  of  women  in  industry.  The 
problem,  too,  is  more  easily  handled  than  that  of  the  labor 


Problems  of  Industry  165 

of. men,  because  the  courts  are  not  handicapped  to  the 
same  extent  in  dealing  with  women,  as  they  are  with  men, 
by  the  right  of  "  freedom  of  contract." 

Unemployment.  —  The  problem  of  the  unemployed 
varies  in  importance  with  changing  industrial  conditions. 
In  times  of  great  prosperity  or  national  exigency,  when 
labor  is  in  great  demand,  little  attention  is  paid  to  this 
problem;  but,  when  the  industrial  or  military  necessity 
has  passed,  the  army  of  the  unemployed  again  assumes 
large  proportions. 

Unemployment  may  be  due  to  personal  causes,  such  as 
malnutrition,  sickness,  and  accidents;  or  to  industrial 
causes,  such  as  industrial  crises,  labor  troubles,  causes: 
and  seasonal  and  casual  trades.  That  mal-  Personal 
nutrition  is  a  very  real  cause  of  unemployment  causes- 
was  well  illustrated  by  an  experiment  made  in  England. 
An  unemployed  farm  colony  was  started,  and  the  unem- 
ployed from  London  were  set  to  work  on  the  land.  During 
the  first  few  weeks  many  of  the  men  were  so  weak  from 
lack  of  food  as  to  be  unable  to  do  more  than  two  or  three 
hours'  work  a  day,  and  that  of  the  poorest  sort.  After 
being  maintained  for  several  weeks  on  good  food,  these 
same  men  were  doing  effective  work.  Just  how  extensive 
is  the  unemployment  caused  by  sickness  and  accidents  we 
have  no  accurate  means  of  knowing.  That  sickness  and 
accidents  exist  is  certain,  and  that  they  cause  unemploy- 
ment'is  obvious;  but,  thus  far,  the  lack  of  organized  ma- 
terial on  the  subject  will  not  permit  more  than  a  passing 
reference  to  them  as  factors  in  the  problem. 

The  industrial  causes  of  unemployment  may  be  grouped 
under  the  head  of  seasonal  trades,  industrial  crises,  labor 
troubles,  and  casual  trades.     Seasonal  trades  are  common, 


1 66  American  Economic  Life 

and  they  inevitably  mean  unemployment.  For  example, 
outside  construction  work  offers  employment  only  at 
industrial  certain  seasons  of  the  year.  The  effects  of  in- 
causes.  dustrial  crises  and  labor  troubles  upon  unem- 

ployment are  also  apparent.  A  chart  of  the  coal  industry 
shows  that  work  is  very  slack  whenever  an  industrial  crisis 
occurs.  For  example,  in  1902,  because  of  the  great  coal 
strike  of  that  year,  the  anthracite  mines  were  worked  only 
one  hundred  and  sixteen  days,  —  about  thirty-eight  per 
cent  of  the  total  number  of  possible  working  days.  A  very 
frequent  cause  of  unemployment  exists  in  certain  trades 
known  as  casual  trades,  —  those  requiring  labor  a  day 
here  or  a  week  there,  but  never  regularly  or  systemat- 
ically. 

The  effects  of  unemployment  are  twofold.  In  the  first 
place,  the  unemployed  himself  is  affected.  Idleness  leads 
Effects  of  to  trouble  and  lawlessness.  Perhaps,  too,  the 
unemploy-  unemployed,  in  his  attempt  to  secure  work,  may 
use  freight  trains  as  a  means  of  getting  from 
place  to  place.  This  happy-go-lucky  life,  once  tasted, 
proves  too  attractive;  and  the  laborer,  freed  from  all 
restraining  influences,  soon  becomes  a  confirmed  "  tramp." 
If  he  is  a  skilled  laborer,  the  unemployed  will  lose  his 
"  knack  "  of  work ;  if  unskilled,  his  physical  strength. 
In  any  event,  this  idleness  will  be  a  drain  upon  his  re- 
sources and  cause  his  efficiency  to  be  lowered.  But  the 
effects  of  unemployment  do  not  cease  with  the  unemployed. 
They  extend  to  his  family.  The  irregular  life  of  the  father 
communicates  itself  to  the  children ;  and  the  lack  of  food, 
resulting  from  a  lack  of  income,  means  malnutrition  for  the 
whole  family  group.  Thus  the  standard  of  social  efficiency 
is  lowered. 


Problems  of  Industry  167 

To  palliate  the  evils  of  unemployment  some  relief,  so  far 
as  the  personal  causes  are  concerned,  may  be  found  in 
sickness,  accident,  and  old-age  insurance.     This 

,.  .  ,  ,     .  -,-,  The  remedy. 

policy  has  been  pursued  in  many  European 
countries,  and  has  lately  been  followed  by  our  own  state 
governments.  Along  with  the  general  movement  for  im- 
proving the  social  condition  of  the  worker  in  regard  to 
hours  of  labor,  conditions  of  work,  and  the  means  of  safe- 
guarding the  health  and  life  of  the  worker,  the  policy  of 
protecting  the  workingman  through  sickness  and  accident 
insurance  has  steadily  gained  ground.  But  the  most 
positive  means  of  solving  the  problem  of  unemployment 
is  to  strike  at  its  causes.  If  industrial  stability  can  be 
secured,  unemployment  will  cease  to  exist.  This  stability 
can  be  attained  only  by  a  comprehensive  government 
policy  that  is  planned  to  meet  future  needs  and  possibilities. 
For  example,  public  construction  works  should  be  so 
planned  that  work  upon  them  may  be  done  in  times  when 
labor  is  plentiful  and  employment  difficult  to  secure. 
There  should  also  be  a  national  system  of  labor  exchanges, 
whereby  an  oversupply  of  labor  in  one  section  may  be 
utilized  in  another  district  where  there  is  a  shortage  of 
labor.  Again,  seasonal  occupations  should  be  properly 
dovetailed  so  that  there  is  no  need  for'  temporary  idleness. 
All  this  can  be  accomplished  only  by  interstate  and  national 
activities  planned  with  great  foresight  on  an  extensive  scale. 

QUESTIONS  FOR  RECITATION 

1.  Is  child  labor  a  new  problem ?    Why  not? 

2.  Where,  and  in  what  occupations,  is  child  labor  found  in  the 
United  States? 

3.  Discuss  the  evils  of  child  labor. 


1 68  American  Economic  Life 

4.  Where  is  child  labor  most  harmful ?    Why? 

5.  What  is  the  remedy  for  child  labor  ? 

6.  What  has  your  state  done  in  regard  to  child  labor? 

7.  Why  are  women  entering  industry? 

8.  What  can  be  said  in  favor  of  this  movement  ? 

9.  What  reasons  are  advanced  against  women  working? 

10.  Why  should  legislation  be  passed  to  protect  working  women? 

11.  Is   unemployment    an   important    problem   at    present?     If 
not,  why  should  we  consider  it? 

12.  What  gives  rise  to  unemployment,  —  individually?  Socially? 

13.  What  is  the  effect  of  unemployment  on  industrial  efficiency? 
On  social  welfare  ? 

14.  How  may  the  evils  of  unemployment  be  remedied,  (1)  nega- 
tively?    (2)  Positively? 

PROBLEMS   FOR  DISCUSSION 

1.  Discuss  the  causes  of  child  labor. 

2.  Is  child  labor  necessary  to  the  production  of  captains  of 
industry  ? 

3.  What  is  the  effect  on  children  of  keeping  them  away  from 
work  until  they  are  sixteen?  Until  they  receive  a  college  train- 
ing? 

4.  Who  is  the  chief  gainer  from  child  labor?  Who  is  the  chief 
loser  ? 

5.  Are  parents  responsible  for  child  labor? 

6.  To  what  extent  are  the  children  themselves  responsible  ? 

7.  Is  it  justifiable  for  women  to  enter  industry? 

8.  Would  you  permit  your  wife  or  daughter  to  take  up  a  gainful 
occupation  ? 

9.  Is  the  frequently  made  statement  —  "woman's  place  is  in  the 
home  "  —  true  ?     Defend  your  position. 

10.  Is  unemployment  necessary?     Explain  your  answer. 

11.  What  is  the  English  system  of  labor  exchanges? 

12.  On  what  grounds  should  society  seek  to  prevent  unemploy- 
ment? 

13.  Is  there  any  "right  to  work"? 

14.  Should  the  government  guarantee  work  at  all  ? 


Problems  of  Industry  169 

15.  On  what  ground  can  you  justify  governmental  action  in  any 
of  these  problems  ? 

16.  What  has  the  national  government  done  in  these  matters? 

17.  What  must  the  government  still  accomplish  in  this  direc- 
tion? 

SUPPLEMENTARY  READING 

Abbott,  E.     Women  in  Industry. 

Adams,  T.  S.,  and  Sumner,  H.  L.    Labor  Problems. 

Beveridge,  W.  H.     Unemployment. 

Burch,  H.  R.,  and  Patterson,   S.   H.    American  Social  Problems, 

Chap.  XIV. 
Devine,  E.  T.    Social  Forces,  Chap.  III. 
Mangold,  G.  B.     Child  Labor  Problems. 
Reports  of  National  Child  Labor  Committee. 
Richardson,  D.     The  Long  Day. 
Seager,  H.  R.     Social  Insurance,  Chap.  IV. 
Spargo,  J.     The  Bitter  Cry  of  the  Children. 


CHAPTER  XVIII 

Social  and  Industrial  Education 

I.   Educational  ideals 
i .   In  ancient  times 

2.  In  the  Middle  Ages 

3.  In  modern  times  : 

a.  The  new  ideal 

b.  The  changed  conditions : 

(1)  How  met  by  higher  education 

(2)  How  met  by  secondary  education 

II.   Uniformity  in  elementary  education 

1 .  Extent  of  uniformity 

2.  The  consequences : 

a.  "  School  mortality  " 

b.  Illiteracy 

c.  Child  labor 

d.  Lack  of  preparation  for  life 

3.  The  remedy  —  differentiation : 

a.  For  boys  and  girls 

b.  For  city  and  country 

c.  For  head  workers  and  hand  workers 

d.  For  different  trades 

4.  The  outlook 

Educational  Ideals.  —  Education  is  the  most  potent 
factor  in  the  promotion  of  social  welfare  and  in  the  develop- 
in  ancient  ment  of  industrial  efficiency.  It  is  the  motive 
times.  force  of  civilized  society.     While  it  has  existed  in 

some  form  or  other  from  time  immemorial,  its  ideals  have 
gradually  changed  from  one  historic  period  to  another. 

170 


Social  and  Industrial  Education  171 

Among  the  ancient  peoples  of  the  East,  where  the  religious 
ideal  predominated,  education  was  confined  to  the  priestly 
caste  and  consisted  largely  of  the  memorization  of  sacred 
texts.  The  Greeks  were  the  first  to  emphasize  the  liberal 
ideal  in  education  and  to  give  to  the  individual  the  op- 
portunity for  self-development  untrammeled  by  religious 
traditions.  Men  have  never  ceased  to  marvel  at  their 
intellectual  and  artistic  attainments;  nor  yet  to  imitate 
them.  This  process  of  imitation  was  first  begun  by  the 
Romans,  who,  however,  became  more  practical  and  legal- 
istic in  their  own  development. 

With    the    establishment    of    Christianity    throughout 
Europe,  the  religious  ideal  again  dominated  the  spirit  of 
education  in  the  Middle  Ages.     While  the  old  Inthe 
learning  and  the  rare  manuscripts  were  preserved  Middle 
in  the  monasteries,  the  liberal  spirit  itself  was  dis- 
placed by  one  of  religious  asceticism.     With  the  Renais- 
sance, however,  the  liberalizing  and  individualistic  spirit 
appeared  once  more.    After  centuries  of  inertia,  freedom 
of  inquiry  was  again  stimulated  and  men  reached  out  for 
the  long  lost  culture  of  the  past.     At  the  same  time,  the 
spirit  of  inquiry  penetrated  into  science  and  the  world  of 
life.     As  this  period  drew  to  a  close,  men  were  peering 
everywhere  into  all  fields  of  human  knowledge  and,  in 
addition,  had  restored  the  old  culture  of  the  Greeks  and 
Romans  to  a  dominating  position  in  civilized  society. 

The    "  classics "    continued    to    hold    this    dominating 
position  in  our  educational  system  until  our  own  genera- 
tion.    To-day,  however,  we  are  gradually  wit-  In  modera 
nessing  the  growth  of  a  new  ideal  in  education,  times:    The 
It  is  the  ideal  of  social  welfare  brought  about  by 
individual  efficiency.    No  longer  is  education  regarded  as 


172  American  Economic  Life 

the  privilege  of  the  few;  no  longer  is  it  monopolized  by 
culture.  Its  aim  is  not  merely  to  equip  a  small  group 
of  men  with  the  highest  culture  of  the  past.  It  still  per- 
forms this  function;  but,  in  addition,  it  aims  to  furnish 
the  masses  with  the  means  of  promoting  their  welfare  and 
efficiency.  This  new  ideal  is  not  aristocratic,  but  demo- 
cratic; not  merely  cultural,  but  useful;  not  purely  indi- 
vidual, but  largely  social. 

This  change  in  the  educational  ideal  has  been  necessi- 
tated by  the  conditions  of  modern  life.  Since  the  great 
The  Industrial  Revolution  of  the  eighteenth  century, 

changed  the  civilized  world  has  become  increasingly  in- 
dustrial and  social  in  all  its  relationships.  Man's 
interests  are  no  longer  confined  to  any  one  type  of  culture. 
Because  of  the  tremendous  changes  of  the  nineteenth  and 
twentieth  centuries  in  economic  and  social  matters,  the  old 
learning  fails  utterly  to  equip  man  with  the  kind  of  knowl- 
edge necessary  to  solve  the  problems  arising  from  the 
development  of  modern  science,  from  the  growth  of  industry, 
and  from  the  spirit  of  cooperation.  The  new  learning, 
therefore,  emphasizes  the  importance  of  practical  science, 
of  industrial  knowledge,  of  sociological  information,  and  of 
vocational  and  professional  training. 

The  institutions  of  higher  learning  have  been  the  first  in 
America  to  make  an  attempt  to  meet  these  changed  condi- 
tions. Realizing  that  education  in  its  truest  sense  is  prepa- 
ration for  the  work  of  life,  these  institutions  have  incorpo- 
rated into  their  curricula  courses  which  have  a  direct  bear- 
ing upon  the  life  of  the  individual.  Schools  of  engineering, 
of  commerce  and  industry,  of  agriculture,  of  architecture, 
and  of  like  character,  are  all  striking  examples  of  this  new 
readjustment. 


Social  and  Industrial  Education  173 

This  tendency  to  prepare  individuals  for  practical  life  so 
that  they  may  be  given  the  basis  of  complete  living  may 
be  observed  also  in  secondary  education.  In  addition 
to  the  classical  high  school,  we  now  have,  in  most  of  our 
large  cities,  high  schools  with  manual  training,  commercial, 
and  vocational  courses.  It  is  true  that  much  remains 
to  be  accomplished  in  the  direction  of  socializing  secondary 
education;  but  too  much  credit  cannot  be  given  to  the 
pioneers  in  this  movement,  who,  seeing  the  evolution  of 
modern  life,  have  attempted  to  make  the  educational 
system  conform  to  its  needs.  Of  the  socializing  movement 
in  education,  Edward  T.  Devine  says,  "  Its  end  is  practical, 
being  the  utilization  of  whatever  is  usable  in  that  which 
the  student  gets  from  history  and  literature  and  science, 
from  disciplinary  studies  and  from  cultural  studies,  to  en- 
rich his  civic  life,  to  insure  his  becoming  a  contributor  to 
social  welfare  instead  of  its  debtor,  to  make  him  less  a 
parasite  and  more  a  creator  of  social  values." 

Uniformity  in  Elementary  Education.  —  It  is  in  primary 
education  that  this  tendency  is  last  to  appear.  The  course 
of  instruction  given  the  child  in  the  elementary  Extent  of 
school  is,  in  many  cities,  still  largely  traditional  uniformity. 
and  generally  uniform.  While  it  is  true  that,  here  and 
there,  experiments  and  innovations  are  being  introduced, 
the  underlying  principle  still  remains  the  same.  The 
primary  school  is  but  a  ladder  to  the  high  school;  the 
high  school  leads  to  the  college.  There  has  been  little 
attempt  to  make  elementary  instruction  fit  the  child's 
individual  needs  and  to  provide  for  his  future  place  in  the 
social  system. 

While  it  is  true  that  this  uniformity  results  in  an  equality 
of  equipment  for  those  completing  the  first  years  of  school 


174  American  Economic  Life 

life,  it  is  nevertheless   disastrous  to  those   who  do   not 

survive  the   rigidity  of  the  work.     Since   the  prescribed 

course  is  distasteful,  the  beginner  drops  out  of 

The  conse-  '  °  r 

quences:       the   race  before   it   is   fairly  begun.      Striking 
"School        evidence  of  this  fact  is  found  in  the  high  per- 

mortality."  . 

centage  of  elementary  "  school  mortality."  This 
mortality  increases  as  the  grades  advance  and  would  be 
appalling  were  it  not  for  compulsory  education  laws. 

The  extent  of  illiteracy  in  the  United  States  is  not  generally 

realized.     Its  prevalence,  however,  is  proved  by 

Illiteracy.  .  .  .   .  .  .  , 

census  investigations  and  by  the  records  of  the 
World  War,  which  revealed  the  presence  of  7,000,000  adult 
illiterates  in  the  United  States.  A  census  bulletin  tells  us 
that  somewhat  more  than  one-tenth  (106  per  1000)  of  the 
population  at  least  ten  years  of  age  is  illiterate.  The  im- 
portance of  this  statement  becomes  particularly  significant 
when  a  comparison  is  made  between  illiteracy  in  the  United 
States  and  in  European  countries  before  the  World  War. 
Of  every  thousand  inhabitants  in  Germany,  Norway,  and 
Sweden,  one  was  illiterate ;  in  Switzerland,  three ;  in 
Denmark,  five;  in  Finland,  sixteen;  in  France,  forty- 
nine  ;  and  in  England,  fifty-eight. 

Another  consequence  of  the  school's  inability  to  hold 
children  because  of  its  uniform  curriculum  is  found  in  the 

existence   of   child   labor.     "  The   most  potent 

Child  labor.  .  .    .  .  .  .,  ,  . . 

reason,  in  my  opinion,  why  children  are  in  the 
factory  is  our  school  system."  This  statement  by  a  fac- 
tory inspector  of  Louisiana  voices  the  opinion  of  many 
social  workers  who  point  to  the  school  as  a  frequent 
cause  of  child  labor.  There  is  little  doubt  that  many 
children  prefer  the  work  of  the  factory  to  that  of  the 
school. 


Social  and  Industrial  Education  175 

Finally,  the  effect  of  uniformity  in  elementary  educa- 
tion extends  to  a  lack  of  preparation  for  life.     Children 
leave  school  and  go  to  work  because  the  school  Lack  , 
system  fails  to  prepare  its  pupils  for  the  life  of  the  preparation 
world.     Seven-eighths  of  the  school  children  of 
the  United  States  never  enter  the   high  school.     "  Yet," 
said  a  critic  of  our  educational  system,  "  one  who  goes  out 
of  the  school  system  before  the  end,  or  at  the  end,  of  the 
elementary  course,  is  not  only  unprepared  for  any  vocation 
which  will  be  open  to  him,  but  too  commonly  he  is  without 
that  intellectual  training  which  should  make  him  eager 
for  opportunity  and  incite  him  to  the  utmost  effort  to  do 
just  as  well  as  he  can  whatever  may  open  to  him." 

What,  then,  should  be  done  to  make  the  school  system 
more  attractive  and  of  greater  service  to  the  average  boy 
and    girl  ?     This    question    is    not    difficult    to  The  remed 
answer.     The  work  of  the  school  should  be  dif-  —  differen- 
ferentiated  according  to  the  needs  of  the  indi- 
vidual and  of  the  community.     Different  training  should 
be  provided  for  girls  and  boys,  for  city  children  and  country 
children,   for  head  workers  and  hand  workers,   and  for 
workers  in  different  trades.     Life  is  so  varied  that  no  one 
training  is  suited  to  all. 

In  the  first  place,  there  is  no  doubt  that  sex  should  play  a 
part  in  determining  the  character  of  education.  While 
it  is  true  that  during  certain  periods  of  life  several  For  f,oys 
millions  of  women  are  engaged  in  industrial  pur-  and  girls- 
suits,  woman,  nevertheless,  is  primarily  engaged  in  the 
home.  Just  as  the  great  majority  of  boys  will  grow  up 
to  use  their  hands,  so  the  great  majority  of  girls  will  grow 
up  to  be  wives  and  mothers.  It  is  perfectly  evident,  there- 
fore, that  elementary  instruction  should  provide  one  kind 


176  American  Economic  Life 

of  training  for  home  makers,  and  another  kind  for  bread- 
winners. A  system  of  education  which  fails  to  recognize 
this  principle  is  altogether  inadequate  to  meet  the  needs 
of  modern  life. 

Likewise,  another  differentiation  is  equally  fundamental. 
The  training  of  boys  and  girls  in  the  city  should  differ 
For  city  and  essentially  from  the  training  of  country  boys  and 
country.  girls.  Education,  primary  as  well  as  secondary, 
should  bear  a  direct  relation  to  the  adult  life  of  the  child. 
City  conditions  are  so  totally  different  from  country  condi- 
tions that  each  set  of  conditions  demands  a  training  pecu- 
liar to  itself.  Industry  is  the  keynote  of  city  life  and 
agriculture  the  basis  of  country  life.  Therefore,  the  train- 
ing of  city  people  should  be  largely  industrial  and  com- 
mercial, while  that  of  country  folk  should  be  chiefly  agri- 
cultural. 

It  is  equally  obvious  that  in  the  city  different  training 
should  be  provided  for  head  workers  and  hand  workers. 
In  general,  the  elementary  curriculum  in  the 
workers  and  past  has  made  provision  simply  for  head  workers. 
workers  ^ut  PernaPs  three-fourths  or  seven-eighths  of  all 
the  boys  and  girls  who  go  through  city  schools 
will  be  called  upon  to  do  work  with  their  hands.  An 
education  which  prepares  for  industrial  efficiency  will, 
therefore,  make  provision  in  the  earliest  grades  for  training 
in  some  form  of  hand  work. 

The  disappearance  of  apprenticeship  from  modern  life 
has  necessarily  widened  the  scope  of  industrial  training 
For  different  m  our  public  school  system.  Save  in  a  few 
trades.  trades,   such  as  plumbing,   the  old  apprentice 

form  of  training  has  passed  away.  As  a  result,  a  new 
duty  has  been  imposed  upon  the  school,  and,  in  many 


Social  and  Industrial  Education  177 

large    cities,    we    find    educational    authorities    gradually 
recognizing  this  obligation. 

If  this  differentiation  in  training  along  the  lines  just 
indicated  is  carried  out,  the  elementary  school,  by  losing  its 
uniformity,  will  be  brought  into  closer  harmony  The  out- 
with  the  conditions  of  modern  life.  A  happy  look- 
augury  for  the  future  is  found  in  the  fact  that,  in  many  of 
our  larger  cities,  attempts  are  being  made  to  bring  about 
this  closer  relation  between  the  work  of  the  school  and  the 
work  of  life.  For  example,  the  introduction  of  sewing  and 
cooking,  the  provision  for  elementary  manual  training, 
the  introduction  of  the  "  Gary  System,"  the  establishment 
of  trade  schools  for  boys  and  girls,  the  junior  high  school 
movement,  and  the  organization  of  vocational  courses 
are  all  hopeful  indications  of  a  recognition  of  this  principle. 
Preparation  for  life,  which  is  the  ideal  of  the  newer  educa- 
tion, will  ultimately  shape  the  work  of  the  elementary 
schools,  as  it  is  molding  that  of  the  high  school  and  the 
university. 

QUESTIONS   FOR  RECITATION 

1.  Discuss  the  early  ideals  of  education. 

2.  Show  the  conditions  that  gave  rise  to  these  ideals. 

3.  Do  these  ideals  persist  in  education  to-day?    Are  they  uni- 
versally accepted  in  America  ? 

4.  What  is  the   new   educational  ideal?    Is   it   universally  ac- 
cepted ? 

5.  Explain   clearly   how   this   new  ideal   has   arisen.      In    your 
opinion,  is  it  final  or  ultimate  ? 

6.  Why  do  educational  ideals  change  ? 

7.  What  kinds  of  knowledge  does  the  modern  educational  ideal 
emphasize  ?    Why  ? 

8.  How  is  the  new  ideal  reflected  in  our  universities  ? 

9.  How  has  the  public  high  school  met  the  conditions  of  mod- 
ern life  ?     What  is  yet  to  be  done  in  this  direction  ? 


178  American  Economic  Life 

10.  What  is  a  distinguishing  feature  of  elementary  instruction 
in  American  public  schools  ? 

11.  What  modifications  of  the  uniform  curriculum  are  necessary 
to  bring  about  a  better  industrial  and  social  training  in  the  ele- 
mentary school  ?     Explain  the  necessity  for  each. 

12.  What  are  the  disadvantages  of  the  uniform  curriculum  of  the 
elementary  school  ?    Explain  each. 

13.  Is  America  progressing  in  the  right  direction  in  shaping  her 
public  educational  system?  What  reasons  have  you  for  so  think- 
ing? 

PROBLEMS  FOR  DISCUSSION 

1.  What  should  be  the  purpose  of  education? 

2.  Should  there  be  definite  connection  between  school  life  and 
life  in  the  world  ?     Why  ? 

3.  What  does  the  school  in  your  community  do  to  prepare  boys 
for  the  work  of  life  ? 

4.  What  life  preparation  does  the  school  furnish  for  girls  ? 

5.  Should  some  form  of  manual  training  be  introduced  in  all 
grades  between  the  kindergarten  and  the  high  school?  How  could 
this  be  done?     Is  the  same  true  of  commercial  training? 

6.  Should  the  public  school  include  domestic  science  training  for 
girls?     Why? 

7.  Is  universal  education  desirable  ?     Explain  your  answer. 

8.  What  advantages  or  disadvantages  would  accrue  to  the  coun- 
try if  free  education  were  abolished  ? 

9.  Would  it  be  wise  to  make  it  possible  for  everybody  to  secure 
a  college  education  ?     Why  ? 

10.  What  has  the  college  done  to  prepare  men  and  women  to  meet 
the  work  of  life  ? 

11.  What  is  the  economic  basis  of  education  ?    The  social  basis  ? 

12.  What  difference  is  there  between  public  and  private  schools 
in  regard  to  educational  policy  and  ideals  ? 

13.  Discuss  the  work  of  Herbert  Spencer  in  education. 

14.  What  right  has  the  student  of  economics  to  be  interested 
in  education? 


Social  and  Industrial  Education  179 

SUPPLEMENTARY  READING 

Devine,  E.  T.    Social  Forces,  Chaps.  VIII  and  XIII. 

Dewey,  J.    Democracy  and  Education. 

Dewey,  J.    Schools  of  To-morrow. 

Draper,  A.  S.    American  Education. 

Gillette,  J.  M.     Vocational  Education. 

King,  I.    Education  for  Social  Efficiency. 

Spencer,  H.    Education. 


CHAPTER  XIX 

The  Nature  or  Capital 

I.    Character  of  capital 
i .   Its  importance  : 

a.  In  primitive  times 

b.  In  modern  times 

c.  In  capitalistic  production 

2.  Examples  and  definition  of  capital 

3 .  Wealth  may  be  consumed  : 

a.  Unproductively 

b.  Productively 

c.  The  final  consequence  : 
(i)  The  diagram 

(2)  The  effect  of  war 

II.   Money  and  capital 
1.   Is  money  capital? 

a.  When  it  is 

b.  When  it  is  not 

,  2 .   The  newer  viewpoint : 

a.  Its  advantage 

b.  Its  disadvantage 

3.  Capital  goods  and  money  capital 

4.  The  conclusion 

Character  of  Capital.  —  Land,  or  natural  resources,  and 

labor,  or  human  energy,  are  spoken  of  as  primary  essentials 

in  production  because  both  must  be  present  at 

tance:  in      all  times  in  every  productive  operation.     The 

primitive        fig^  m  foe  stream,  and  the  coal  on  the  mountain 

times. 

side,  cannot  be  converted  into  wealth,  if  there 
are  no  people  to  catch  the  one,  or  to  pick  up  the  other. 

180 


The  Nature  of  Capital  181 

In  the  same  way,  if  there  are  no  fish  to  catch  and  if  there 
is  no  coal  to  mine,  labor  will  be  helpless  and  unable  to 
produce  wealth.  There  is,  however,  still  another  factor 
in  production.  While  land  and  labor  are  the  primary 
essentials  in  any  productive  operation,  there  is  a  secondary 
essential,  —  capital.  Capital  is  spoken  of  as  secondary 
because  it  is  the  result  of  the  application  of  labor  to  natural 
resources.  If  all  the  capital  in  a  community  were  de- 
stroyed, it  could  be  replaced  by  the  application  of  labor  to 
land.  In  primitive  times  little,  if  any,  capital  really 
existed.  What  capital  we  now  have,  therefore,  is  the 
result  of  man's  utilization  of  natural  resources ;  it  is  the 
offspring  of  land  and  labor. 

Modern  industry,  however,  requires  the  presence  of 
all  three  factors.  To-day,  capital  is  as  essential  to  pro- 
duction as  land  or  labor.  It  is  impossible  to  jw  modem 
picture  a  present-day  productive  enterprise  times- 
being  carried  on  without  the  aid  of  capital.  The  old 
primitive  methods  have  gone  forever.  The  spectacle  of  a 
savage  catching  fish  from  the  brook  with  his  hands,  i.e. 
without  capital,  has  no  modern  counterpart.  Hooks  and 
nets,  the  products  of  past  industry  created  by  application 
of  labor  to  land,  have  now  become  as  essential  to  fishing 
as  the  fish  and  the  man  himself.  Therefore,  to  catch  fish, 
i.e.  to  produce  wealth  by  creating  utilities  in  the  fish, 
capital  is  required. 

Thus,     modern    production    is    distinctly    capitalistic 
production.     By  this  we  mean  that  man  has  inextricably 
introduced  into  production  a  third  factor,  which    ,        .  . 
has  become  co-equal  in  importance  with  land  isHcfro- 
and    labor.     This    capitalistic    production    has 
changed  the  old  direct  relationship  that  existed,  in  primitive 


182  American  Economic  Life 

times,  between  man  and  nature.  Instead  of  being  simple 
and  direct,  production  now  becomes  complex  and  indirect. 
In  fact,  capitalistic  production  is  exceedingly  roundabout, 
and  becomes  still  more  so  with  every  advancing  step  of 
civilization.  With  the  age  of  inventions  and  the  develop- 
ment of  machinery,  the  process  of  production  has  become 
so  complicated  and  the  importance  of  capital  so  tremendous 
that  civilization  itself  is  spoken  of  as  being  in  the  capitalistic 
stage  of  development.  The  new  factor  at  times  almost 
overshadows  the  original  elements;  the  child  almost 
dominates  the  parents.  Instead  of  depending  upon  primi- 
tive implements  and  crude  tools,  production  now  depends 
upon  huge  plants  and  factories  equipped  with  costly  machin- 
ery and  other  highly  specialized  products  of  past  industry. 

There  are  a  thousand  ways  in  which  the  products  of 
past  industry  aid  man  in  producing  wealth,  and  every  such 
instrument  constitutes  a  form  of  capital, 
^xamp  e.  xjn(jer  this  term  we  may  include :  (i)  improve- 
definition  ments  on  land;  (2)  roads,  railroads,  telegraph 
and  telephone  lines;  (3)  tools,  machines,  and 
mechanical  appliances ;  and  (4)  raw  materials  to  be  used 
in  later  manufacturing.  All  these  constitute  wealth,  and 
all  help  man  to  produce  additional  wealth.  Capital, 
therefore,  may  be  said  to  be  that  part  of  wealth  used  to 
produce  more  wealth.     It  is  the  "  tools  "  of  production. 

All  wealth  is  not  capital.  The  test  whether  or  not  wealth 
is  capital  is  the  way  in  which  it  is  used.  If  a  nation  or  an 
„r   ^  individual  has  wealth  and  consumes  it  unpro- 

Wealth  .  ... 

consumed:     ductively,  then  this  wealth  is  not  capital.     The 

Unproduc-     man   wno    dissipates    a    fortune    prevents    the 

employment    of    so    much    wealth    as    capital. 

The  Pyramids  of  Egypt,   although  representing  a  vast 


The  Nature  of  Capital 


183 


outlay  of  materials  and  labor,  are  not  capital.  Wealth 
used  unproductively,  whether  by  man  or  by  society,  is  not 
capital. 

Wealth  may,  however,  be  consumed  productively. 
The  wealth  represented  by  railroads,  machinery,  and 
buildings  is  capital  because  it  is  being  used  to  produc- 
produce  more  wealth.  Capital,  therefore,  de-  tively- 
pends  upon  the  productive  use  of  wealth.  A  man  with  a 
fortune,  instead  of  squandering  it,  may  invest  it  in  a 
business  and  thus  convert  it  into  capital.  A  nation  with 
great  natural  resources  may  so  direct  its  energies  as  to 
produce  vast  quantities  of  goods  to  be  used  in  future 
production. 

Every  individual  possessed  of  wealth  has,  therefore,  two 
choices  open  to  him.  He  may  use  it  productively  or  un- 
productively. If,  through  waste,  luxury,  and 
extravagance,  man  uses  his  wealth  unpro- 
ductively, he  not  only  destroys  his  own  wealth,  but  also 
decreases  the  productive  forces  of  the  community.  On 
the  other  hand  if,  by  enlarging  his 
plant  and  installing  new  machinery, 
he  uses  his  wealth  productively,  he 
not  only  keeps  his  original  wealth  but 
adds  to  it  through  production. 

This  principle  may  be  illustrated 
by  the  accompanying  diagram.  When 
$10,000  worth  of  wealth  is  consumed 
along  the  line  U,  that  is,  unproduc- 
tively, it  becomes  completely  dissi- 
pated. The  individual,  himself,  loses 
it  and  its  consumption,  let  us  say,  in 
the  form  of  extravagant  banqueting 


The  final 
consequence. 


184  American  Economic  Life 

and  entertaining,  results  in  lowering  the  efficiency  of  the 
productive  forces  of  society.  When,  however,  this  same 
wealth  is  consumed  along  the  line  P,  its  consumption  results 
in  the  production  of  $500  more  wealth  and  the  original 
$10,000,  which  is  now  capital,  remains  in  industry.  If, 
instead  of  consuming  wealth  in  the  form  of  extravagant 
and  luxurious  living,  man  invests  his  wealth  in  govern- 
ment bonds,  in  bank  holdings,  or  in  some  other  form  of 
productive  enterprise,  he  ceases  to  be  a  spendthrift  and 
becomes  thereby  a  capitalist. 

In  this  connection  it  is  well  to  contemplate  the  effect 
of  war  upon  capital.  Nations,  like  individuals,  may  reck- 
lessly waste  the  wealth  of  society.  When,  like  Germany 
before  the  World  War,  they  are  consciously  organized  for 
the  promotion  of  war  and  conquest,  they  are  known  as 
militant  societies,  as  distinguished  from  industrial  so- 
cieties, where  the  governmental  organization  is  directed 
toward  the  production  of  national  wealth  and  the  pro- 
motion of  social  welfare.  The  United  States  has  always 
been  organized  politically  along  the  line  of  industrial 
development.  As  a  result,  the  accumulations  of  capital 
in  this  country  are  greater  than  in  any  other  single  nation 
in  the  world.  On  the  continent  of  Europe,  war  has  resulted 
in  the  destruction  of  billions  of  dollars'  worth  of  wealth 
and  capital.  If  it  were  possible  to  abolish  war,  all  this 
unproductive  consumption  of  wealth  would  be  eliminated. 
If  this  is  not  possible,  a  nation's  war  machinery  should  be 
made  secondary  to  its  industrial  life.  In  this  manner,  fleets 
and  armies  become  a  protective  agency  for  the  development 
of  industry  and  national  life.     This  is  the  American  policy. 

Money  and  Capital.  —  One  of  the  first  questions  that 
arises  in  a  discussion  of  capital  is  the  query,  "  Is  money 


The  Nature  of  Capital  185 

capital  ?  "     Money  is  a  product  of  past  industry  and  is  used 
to  assist  in  production.     In  order  to  prepare  it  for  circula- 
tion, the  mint,  equipped  with  expensive  capital,   Is  money 
has  expended  labor  in  turning  the  bullion  into  capital? 
its  present  form.     Furthermore,    money  is  an   When  u "' 
absolute  necessity  in  productive  operations.     The  grocer 
needs  money  to  make  change ;    the  manufacturer  needs  it 
to  pay  his  employees  on  Saturday  night;    the  consumer 
needs  it  to  purchase  bread  from  the  baker  and  milk  from 
the  dairy.     In  other  words,  money  performs  a  very  essential 
part  in  aiding  modern  production.     If  money,  then,  is  the 
product  of  past  industry  and  performs  a  part  in  production, 
it  must  be  capital. 

But  these  arguments  do  not  apply  to  all  money.  If  a 
man  should  receive  fifty  dollars  and  should  put  them  in  a 
stocking  behind  the  chimney,  this  money  would  when  it 
not  be  capital  because  it  would  not  be  assisting  is  noL 
in  production.  It  is,  therefore,  fair  to  conclude  that, 
as  with  other  commodities,  money  may  be  capital  or  it  may 
not  be  capital.  The  question  as  to  its  status  at  any  given 
time  may  be  determined  only  by  knowing  whether  or  not 
the  money  under  consideration  is  being  used  to  assist  in 
production. 

This  statement  represents  one  view  of  capital,  accord- 
ing to  which  goods  assisting  in  production,  whether  directly 
or  indirectly,  are  included  in  capital.  According  The  newer 
to  another  view,  in  order  to  be  capital,  a  good  v^p0"1*: 
must  aid  directly  in  production.  The  ax  used  by  a  wood- 
man to  cut  down  a  tree  is  capital,  because  it  is  the  product 
of  past  industry  and  is  being  used  directly  to  assist  in 
future  production.  On  the  other  hand,  the  breakfast 
eaten  by  the  woodman  assists  production  only  indirectly 


1 86  American  Economic  Life 

and  therefore  may  not  be  capital.  Economists  are  accept- 
ing the  latter  view  more  and  more,  so  that  money  in  order 
to  be  capital  must  assist  directly  in  productive  operations, 
—  that  is,  it  must  be  used  by  the  grocer  to  make  change, 
by  the  employer  to  pay  wages,  or  by  the  producer  to  pur- 
chase raw  materials. 

This  newer  view  has  the  advantage  of  clarity  of  thought 
and  directness  of  understanding.  It  is  easy  to  determine, 
its  ad-  m  a  given  case,  whether  an  actual  good  is  assist- 

vantage.  mg  m  production.  The  ax  really  does  aid  in  the 
productive  enterprise  of  lumbering;  while  the  breakfast 
may  not  only  not  aid  in  production,  but,  by  causing  in- 
digestion, result  in  an  actual  loss  of  productive  power. 
It  is  a  simple  device,  therefore,  to  divide  goods  into  "  con- 
sumption goods  "  and  "  capital  goods."  Food,  clothing, 
and  shelter  are  obviously  in  the  former  class,  while  factories 
and  machinery  are  in  the  latter  group. 

However,  it  is  questionable  whether  all  goods  can  be 
disposed  of  so  easily.  Sometimes  the  consumption  good 
its  disad-  plays  a  most  important,  if  indirect,  part  in  the 
vantage.  process  of  production ;  in  fact  it  is  often  essen- 
tial to  the  final  act  of  production.  Are  we,  therefore,  on  a 
mere  technicality  of  definition,  to  deny  such  a  good  the 
right  to  the  term  capital?  During  the  World  War,  for 
example,  the  production  of  ships  at  Hog  Island  in  Phila- 
delphia was  greatly  delayed,  and  therefore  decreased,  by 
reason  of  the  fact  that  proper  housing  could  not  be  pro- 
vided the  workers.  A  home  for  the  worker  was,  in  this 
case,  just  as  essential  to  the  production  of  ships  as  the  tools 
with  which  he  worked.  The  first  aided  indirectly,  as 
much  as  the  second  aided  directly,  in  the  process  of  pro- 
duction. 


The  Nature  of  Capital  187 

As  ordinarily  used,  the  term  capital  refers  to  a  more  or 
less  continuous  and  unchangeable  thing.     A  business  may 
be    capitalized    at    fifty    thousand    dollars    for 
twenty    years.     During    this    time,     however,   goods  and 
every  tool  and  machine  used  in  the  work  may  mo?®J 
have  been  replaced  by  new  ones.     The  "  capital  " 
has  remained  the  same,  but  the  "  capital  goods  "  —  the 
various  elements  making  up  the  capital  —  have  been  worn 
out  and  replaced.     In  this  fact  lies  an  important  distinc- 
tion.    Capital  is  the  intangible,  continuous  thing  which 
represents  the  total  money  value  of  the  particular  wealth- 
producing  products  employed  in  the  production  of  new 
wealth.     Capital  goods,  on  the  other  hand,  represent  the 
individual  machines,  engines,  and  other  tools  of  production, 
which  wear  out  in  the  course  of  time  and  are  replaced. 
Capital  is  a  constant  factor.     Capital  goods  are  constantly 
changing. 

Throughout  all  these  distinctions,  however,  the  funda- 
mental nature  of  capital  is  apparent.  As  a  first  requisite, 
capital  must  be  material  wealth.  Popular  The  con. 
writers  and  speakers  are  fond  of  referring  to  clusion- 
"  brains  "  as  capital  and  of  using  the  phrase  "  capitalizing 
the  intellect."  But  these  expressions  are  merely  figurative. 
Brains  may  be  greater  than  capital,  but  they  do  not  con- 
stitute capital  in  the  economic  sense,  because  they  are 
not  material  wealth.  In  the  second  place,  not  all  material 
wealth  is  capital.  Only  that  part  of  material  wealth  is 
capital  which  assists  in  production.  The  part  is  not  equal 
to  the  whole.  Finally,  this  assistance  is  usually,  if  not 
always,  a  direct  element  in  the  process  of  production. 


188  American  Economic  Life 


QUESTIONS  FOR  RECITATION 

i.   Contrast  the   importance  of   capital   before   the  eighteenth 
century  with  its  position  after  the  eighteenth  century. 

2.  Give  some  examples  of  capitalistic  production. 

3.  Define  capital.     Give  ten  examples. 

4.  Is  your  fountain  pen  capital  ?     Explain  fully. 

5.  Why  do  we  put  our  wealth  into  railroads  rather  than  into 
pyramids  ? 

6.  Are  the  following  capital:    pig  iron,  a  plow,  candy  in  the 
store,  tobacco  in  the  laborer's  pipe,  coal  ?     Tell  why  in  each  case. 

7.  If  you  had  $1000  left  you,  would  you  take  a  pleasure  trip  or 
go  to  college?    Why? 

8.  Show,  by  historical  illustrations,   the  effects  of  war  upon 
capital. 

9.  Is  money  capital ?    Why? 

10.  What  is  the  most  definite  point  of  view  to  take  regarding  the 
way  in  which  capital  should  aid  in  production  ?     Give  an  example. 

11.  What  disadvantages  has  such  a  point  of  view  ?    Illustrate. 

12.  Show  the  difference  between  capital  and  capital  goods.     Give 
examples. 

PROBLEMS  FOR  DISCUSSION 

1.  Why  is  labor  called  "the  mother  of  capital"?    Is  it  true? 

2.  What  are  the  consequences  of  capitalistic  production  upon 
labor  ? 

3.  Discuss  the  relation  between  the  consumption  of  wealth  and 
the  creation  of  capital. 

4.  Show  how  you  yourself  may  become  a  capitalist. 

5.  Distinguish   between   natural   resources   and   capital;    give 
examples. 

6.  Distinguish  between  wealth  and  capital ;  give  examples. 

7.  During  the  World  War,  did  capital  in  the  United  States  in- 
crease or  decrease  ?     Explain  this  phenomenon. 

8.  Does  capital  really  produce  ?    How  ? 

9.  Name  some  employment,  if  you  can,  in  which  labor  produces 
without  capital. 


The  Nature  of  Capital  189 

10.  Are  securities  capital  ?    Explain  your  answer. 

11.  Explain  the  importance  of  banks  to  the  community. 

SUPPLEMENTARY  READING 

Ely,  R.  T.    Outlines  of  Economics,  Chap.  VII. 
Fetter,  F.  A.     Principles  of  Economics,  Chap.  IX. 
Fisher,  I.     The  Nature  of  Capital  and  Income,  Chaps.  I,  II. 
Marshall,  A.     Principles  of  Economics,  Book  IV,  Chap.  VII. 
Mill,  J.  S.     Principles  of  Political  Economy,  Chaps.  Ill,  IV. 
Seager,  H.  R.    Introduction  to  Economics,  Chap.  VII. 
Thompson,  C.  F.    Elementary  Economics,  Chap.  X. 


CHAPTER  XX 
The  Increase  of  Capital 

I.   Origin  of  capital 

i .   Capital  results  from  saving : 

a.  How  men  first  saved 

b.  How  the  habit  spread 

c.  How  savings  are  capitalized : 
(i)  By  the  bank 

(2)  By  individuals 

(3)  By  corporations 

(4)  By  other  companies 

2.  Capital  may  result  from  efficiency 

3.  Capital  increases  with : 

a.  The  desire  to  save 

b.  The  amount  that  can  be  saved 

II.    Kinds  of  capital 

1 .  The  different  forms : 

a.  Circulating  and  fixed  capital 

b.  Specialized  and  free  capital 

2.  The  dangers: 

a.  From  too  much  fixed  capital 

b.  From  too  much  specialized  capital 

c.  From  mismanagement  of  capital 

Origin  of  Capital.  —  When  the  savage  of  Australia  found 
a  whale,  which  had  drifted  ashore  in  a  storm,  he  at  once 
Capital  summoned  his  friends  and  neighbors  and  had  a 

results  from  banquet.     Sometimes  they  ate  for  a  week,  and 
sometimes    longer,    and    sometimes    they    died 
from  overeating ;   but  they  ate  until  all  of  the  whale  was 

190 


The  Increase  of  Capital  191 

gone,  and  then  eked  out  an  existence  on  berries  and  such 
food  as  they  could  find  until  the  gods  should  send  them 
another  whale.  Civilized  man,  however,  has  a  different 
method  of  treating  wealth.  When  he  secures  a  large 
amount  of  food,  or  its  equivalent  in  money,  he  does  not 
eat  it  up  at  once,  but  puts  by  a  portion  for  a  "  rainy  day." 

Even  within  comparatively  modern  times  society  has 
possessed  only  a  relatively  small  amount  of  wealth,  most 
of  which  was  needed  for  present  consumption,  now  men 
In  such  times,  therefore,  capital  could  be  accumu-  first  saved- 
lated  only  by  saving;  that  is,  instead  of  consuming  all 
that  he  produced,  man  abstained  from  consumption  and 
consumed  but  a  small  amount  of  what  he  would  otherwise 
have  used  up.  When  he  had  saved  sufficient  wealth 
through  this  abstinence,  he  used  it  to  secure  some  new  tool, 
such  as  a  windmill  or  a  sailboat,  that  would  increase  his 
power  to  produce  wealth. 

As  a  result  of  this  early  necessity  for  saving,  the  ideal 
of  saving  spread  throughout  the  whole  race  by  means  of 
the  teachings  of  the  family,  the  schools,  the  now  the 
churches,  and  other  agencies  of  instruction.  habit  sPread- 
The  consequence  of  this  education  was  the  development  of  a 
strong  desire  to  save.  To-day  this  attitude  is  well  illus- 
trated by  the  immigrant,  who  comes  to  the  United  States 
and  subsists  on  a  comparatively  low  standard  of  living  in 
order  that  he  may  have  a  competence  for  his  old  age. 

Saving  has  thus  become  one  of  the  virtues  of  civilization ; 
yet  few  who  save  really  understand  the  connection  between 
saving  and  capital,  and  the  great  service  per-    Eowsav_ 
formed  by  the  bank  in  this   respect.     A  child  ingsare 
receives  a  five-dollar  gold  piece  from  its  grand- 
mother and  takes  it  home  in  great  glee.     Acting  on  the 


192  American  Economic  Life 

advice  of  his  parents,  he  puts  the  gold  piece  in  the  savings 
bank  with  the  implicit  belief  that  the  same  five-dollar 
gold  piece  will  be  returned  by  the  bank  whenever  the 
demand  is  made  upon  it.  But  the  bank  is  not  doing 
business  in  this  way. 

The  bank  acts  as  a  loan  agent.  For  example,  a  pro- 
spective shoe  manufacturer  wishes  to  start  business,  and 
the  bank,  upon  being  furnished  proper  security,  lends  him 
fifty  thousand  dollars.  The  child's  five-dollar  gold  piece, 
together  with  hundreds  of  similar  deposits,  goes  to  make 
up  this  loan.  With  the  money  or  credit  thus  secured  the 
manufacturer  begins  work.  He  builds  his  factory,  em- 
ploys labor,  and  enters  the  shoe  market,  using  his  wealth 
to  produce  more  wealth.  At  the  end  of  a  year  he  has  done 
such  a  successful  business  that  he  has  made  fifteen  per 
cent  on  his  original  investment.  Out  of  this  fifteen  per 
cent  he  pays  the  bank  six  per  cent  for  the  use  of  its  money 
or  credit,  and  out  of  this  six  per  cent  the  bank  pays  the 
child  three  per  cent,  or  fifteen  cents,  for  the  use  of  his  five 
dollars.  In  this  way,  every  one  engaged  in  this  capitalistic 
transaction  has  been  the  gainer. 

For  many  years  this  was  almost  the  only  method  of 
capitalizing  savings,  and  it  is  still  the  most  usual  means 
employed.  The  bank  acted  as  a  loan  agent  for  any  one 
who  wished  to  secure  money  and  who  could  furnish  reliable 
security  as  collateral.  Its  loanable  funds  were  secured 
from  a  large  number  of  people  in  the  community,  each  of 
whom  wished  to  invest  a  small  amount  of  money,  but  no 
one  of  whom  was  sufficiently  well  off  to  be  able  to  lend  a 
large  sum  such  as  a  manufacturer  would  require. 

There  were,  to  be  sure,  cases  of  individuals  who  had  saved 
considerable  sums;    and,  when  Farmer  Williams  wished 


The  Increase  of  Capital  193 

to  build  a  barn,  he  went  to  Farmer  Jones  and  borrowed 
five  hundred  dollars  on  a  mortgage.  But  this  was  an  un- 
certain way  of  carrying  on  an  enterprise.  Every  com- 
munity did  not  have  a  Farmer  Jones.  Besides,  as  industry 
grew,  neither  five  hundred  dollars  nor  five  thousand 
dollars  was  enough  to  start  a  business.  Even  though  he 
had  it,  no  person  wished  to  lend  the  large  sum  necessary 
to  begin  a  modern  business  enterprise. 

To  meet  this  contingency  a  new  plan  has  recently  been 
developed  and  perfected.  The  shoe  manufacturer  decides 
to  begin  business,  but,  instead  of  going  to  the  bank  with 
his  collateral  and  borrowing  fifty  thousand  dollars,  he  in- 
corporates his  business;  that  is,  he  secures  a  charter,  a 
board  of  directors  is  appointed,  and  stocks  and  bonds  are 
issued.  These  stocks  and  bonds  are  then  sold  to  the  people 
in  the  community  who  wish  to  invest  their  money  and  who 
do  not  wish  to  engage  in  business  themselves.  Thus, 
perhaps  without  the  intervention  of  the  bank  and  with  the 
bank's  profit  eliminated,  the  business  man  secures  his 
capital  directly  from  the  person  who  has  saved  it  and  who 
desires  to  invest  it.  At  the  same  time,  no  one  is  called  on 
to  invest  a  large  amount.  A  company  may  be  capitalized 
for  ten  million  dollars,  but  an  individual,  by  buying  merely 
one  share,  needs  to  invest  only  fifty  or  one  hundred  dollars 
in  the  enterprise. 

Trust  companies,  insurance  companies,  and,  in  a  limited 
sense,  building  and  loan  associations  likewise  exercise  the 
functions  of  the  bank  and  act  as  loan  agents  for  investors 
and  borrowers;  but,  in  recent  years,  the  corporation,  by 
selling  stocks  and  bonds  and  paying  good  rates  of  interest, 
has  sometimes  taken  the  place  of  the  intermediary  banking 
establishments  and  gone  directly  to  the  individual  saver. 


194  American  Economic  Life 

When  wealth  is  scarce  and  living  precarious,  man  must 
scrape  and  save  in  order  to  put  something  aside  for  the 

future.  But  the  problem  of  capital  may  be 
result  from    looked   at   from   another   standpoint.     To-day, 

where  wealth  is  plentiful,  man's  ability  to 
accumulate  capital  may  depend  not  only  on  saving  but 
also  on  efficiency.  For  example,  a  man  earning  thirty 
dollars  a  week,  and  desiring  to  become  a  capitalist,  has 
two  courses  open  to  him.  He  may  lower  his  standard 
of  living,  and,  by  consuming  less  than  he  requires,  save 
ten  dollars  of  his  weekly  wages.  Or,  by  hard  work  and 
additional  training,  he  may  increase  his  efficiency  so  that 
he  now  has  an  earning  capacity  of  forty  dollars  a  week. 
This  extra  ten  dollars  then  forms  a  fund  for  investment 
and  starts  him  on  the  road  of  the  capitalist. 

The  increase  of  capital,  therefore,  depends  upon  two 
elements.  In  the  first  place,  man  must  develop  the  dis- 
Capitai  position  to  save.     It  is  here  that  the  ideal  of 

mcreases  thrift  assumes  its  greatest  importance.  So  long 
Desire  as   individuals   are   wasteful   and   extravagant, 

to  save.  little  if  any  capital  can  be  accumulated.     In  fact, 

under  these  conditions  the  capital  in  existence  will  quickly 
disappear.  This  desire  to  save,  too,  is  a  measure  of  the 
individual's  stage  of  development.  Civilized  man  is 
thrifty,  and  places  the  future  above  the  present,  the  un- 
seen above  the  seen.  Primitive  man  is  improvident,  and 
places  the  present  above  the  future,  the  seen  above  the 
unseen.  So  long  as  such  wasteful  qualities  prevail,  no 
progress  can  be  attained.  The  people  of  Holland  and 
France  are  typical  examples  of  civilized  societies  that 
show  what  may  be  accomplished  through  the  development 
of  thrift  in  industry. 


The  Increase  of  Capital  195 

But  the  desire  to  save  is  in  itself  not  sufficient  for  the 
development  of  capital.  Capital  will  not  increase  merely 
through  a  desire  to  save;  there  must  be  some-  Amount  that 
thing  to  save.  The  greater  that  "  something,"  can  be  saved. 
the  greater  will  be  the  possibilities  for  the  increase  of 
capital.  Here  it  is  that  the  idea  of  efficiency  becomes 
important.  The  amount  of  wealth  produced  increases 
with  the  efficiency  of  the  worker.  So  long  as  a  people 
are  inefficient  and  backward  in  production,  just  so  long 
will  they  fail  to  accumulate  a  large  fund  of  capital.  This 
has  been  China's  great  drawback  throughout  the  cen- 
turies. On  the  other  hand,  the  American  system  of  pro- 
duction is  so  efficient  that  the  fund  from  which  capital 
is  drawn  is  constantly  increasing.  Professor  Friday  of  the 
University  of  Michigan  estimated  that  the  capital  in  the 
United  States  increased  from  $4,522,000,000  in  1913  to 
$21,510,000,000  in  1918.  He  further  maintained  that 
"in  1 91 8  approximately  thirty  per  cent  of  our  national 
income  "  was  saved. 

Kinds  of  Capital.  —  We  have  yet  to  examine  the  different 
kinds  of   capital  and  the  problems   arising  from   them. 
Capital     is     described     as     "  circulating "     or 
"  fixed,"    and    as     "  specialized "    or     "  free."  circulating 
Circulating    capital    is     capital    which     is    de-  and  fixed 
stroyed  by  a  single  use,  such  as  coal,  and  other 
raw    materials    immediately   consumed.     In   contrast    to 
this,  fixed  capital  is  capital  which  can  be  used  for  a  con- 
siderable  length  of   time  without   being  destroyed.     Ex- 
amples  of   fixed   capital   are   locomotives,  factories,  and 
ships. 

Again,  capital  which  is  molded  into  a  form  which  can  be 
used  only  for  a  particular  purpose  is  called  specialized 


196  American  Economic  Life 

capital.  The  degree  of  specialization  may  be  great  or 
moderate.  For  example,  a  press  which  will  stamp  out 
specialized  twenty-dollar  gold  pieces  is  an  extreme  form 
capital.  0{    specialized   capital,   because   there   are   but 

a  few  places  in  the  world  where  twenty-dollar  gold  pieces 
are  stamped.  A  crane  built  to  carry  fifty  tons  is  a  less 
specialized  form  of  capital.  The  crane  may  be  of  service 
in  any  one  of  several  industries,  while  the  coin  press  can  be 
used  in  but  one. 

In  contrast  to  this,  capital  is  said  to  be  free  when  »it 

exists  in  a  form  that  may  be  used  in  a  large  number  of 

industries.     For  example,  pig  iron  is  free  capital. 

Free  capital.     ,  .  ,   .  .  .  f  .„ 

It  can  be  converted  into  carriage  springs,  drills, 
car  wheels,  and  hundreds  of  other  things.  The  ordinary 
machinist's  lathe  is  somewhat  specialized,  but  it  would  be 
considered  almost  free  in  contrast  with  a  lathe  made  to 
turn  a  ten-thousand-pound  shaft.  When  capital  is  usable 
in  only  a  few  ways,  it  is  specialized ;  when  it  is  usable  in 
many  ways,  it  is  free. 

One  of  the  great  problems  in  the  development  of  capital 
is  to  determine  how  much  capital  should  be  utilized  in  the 
_  form  of  fixed,  and  how  much  in  the  form  of 

Dangers :  7 

From  too  circulating,  capital.  Wealth  in  the  form  of 
much  fixed      fixed  capital  cannot  of  course  be  converted  imme- 

capital.  ..        _      .  .        ,      .  .      ,  ,     , 

diately  into  circulating  capital,  and  the  progress 
of  the  community  may  thus  be  seriously  hampered  by  the 
lack  of  a  sufficient  amount  of  circulating  capital.  For 
example,  one  of  the  causes  of  the  panic  of  1873  was  the 
conversion  of  a  large  amount  of  the  wealth  of  the  community 
into  fixed  capital  in  the  form  of  railroads.  As  it  turned 
out,  too  great  a  proportion  of  the  country's  wealth  was 
put  into  this  form  of  capital  and  a  business  tie-up  resulted. 


The  Increase  of  Capital  197 

In  the  same  way,  if  too  large  a  proportion  of  capital  is 
turned  into   specialized  goods,  it   is    clear   that  industry 
will  suffer  because  of  a  lack  of  capital  which 
can  be  diverted  into  the  kinds  of  production  muThspe- 
that  will  meet  the  changing  demands  of  modern  ciali?ed 

0     °  t  capital. 

society.  In  the  early  part  of  the  nineteenth 
century  an  enormous  amount  of  wealth  was  converted  into 
canals,  —  a  form  of  fixed  specialized  capital.  Many  more 
canals  were  built  than  the  traffic  warranted,  and  the 
wealth  sunk  in  many  of  the  canal  projects  was  completely 
lost.  The  present  mobility  of  capital  in  the  United  States, 
that  is,  its  ability  to  change  from  one  use  to  another,  is 
shown  by  the  marvelous  growth  of  the  automobile  industry. 
So  long  as  capital  is  sufficiently  mobile  to  flow  readily  from 
one  industry  to  another,  or  so  long  as  there  is  sufficient 
wealth  to  form  capital  for  new  industries,  the  industrial 
conditions  in  the  community  are  sound. 

Since  modern  production  is  so  intimately  connected  with 
the  maintenance  of  capital,  the  question  of  its  management 
is  of  vital  importance.     Capital  is  brought  to- 
gether in  a  corporate  form  by  a  great  aggregation  manage. 
of  small  investments.     If,  therefore,  this  capital  men!  °f 
is  managed,  not  in  the  interest  of  stockholders, 
but  in  the  interest  of  officers  of  corporations,  the  whole 
community  will  be  in  danger,  because  the  loss  due  to  mis- 
management will  fall  on  the  rank  and  file  of  industry  as 
well  as  upon  the  stockholders.     The  welfare  and  prosperity 
of  the  United  States  are  intimately  dependent  upon  wisdom 
and  integrity  in  the  management  of  capital. 


198  American  Economic  Life 

QUESTIONS  FOR  RECITATION 

1.  Describe  the  life  of  primitive  man  so  far  as  it  affects  the  ac- 
cumulation of  capital. 

2.  Give  some  examples  of  modern  counterparts  in  this  respect. 

3.  Why  did  man  in  his  early  history  continually  have  to  practice 
abstinence  ?     Why  does  he  still  have  to  ? 

4.  Is  it  possible  to  satisfy  all  our  wants?  If  we  cannot,  which 
wants  should  be  left  unsatisfied?     Why? 

5.  Explain  how  the  habit  of  saving  has  spread. 

6.  Through  what  modern  agencies  are  savings  capitalized? 
Explain  how  each  operates. 

7.  Why  are  individual  savings  nowadays  inadequate  separately 
to  capitalize  modern  business  ?  What  modern  devices  are  employed 
to  overcome  this  difficulty  ? 

8.  Trace  the  history  of  a  ten-dollar  bill  after  it  is  deposited  in 
the  bank. 

9.  Show  the  part  played  by  efficiency  in  the  accumulation  of 
capital. 

10.  Upon  what  does  the  increase  of  capital  depend?    Explain 
each  factor. 

11.  Show  why  capital  is  either  scarce  or  plentiful  in : 

a.  Mexico.  c.   China.  e.   Spain. 

b.  United  States.  d.   France.  /.   Holland. 

12.  Name  four  kinds  of  capital;    explain  and  give  examples  of 
each. 

13.  Show  the  danger  that  may  result  from  "tieing  up"  too  much 
capital. 

14.  How  may  capital  be  mismanaged?     What  evils  may  result? 
What  should  be  the  proper  method  of  management  ? 

PROBLEMS  FOR  DISCUSSION 

1 .  What  prompts  the  average  man  to  save  ? 

2.  Why  do  Americans  sometimes  look  down  upon  immigrants 
who  maintain  a  low  standard  of  living  in  order  to  save  ? 

3.  Is  it  better  for  a  man  to  maintain  a  high  standard  of  living, 
or  to  save  by  lowering  his  standard?  What  other  course  is  open 
to  him? 


The  Increase  of  Capital  199 

4.  Is  the  spender  or  the  saver  more  advantageous  to  the  com- 
munity?   Explain  fully. 

5.  Is  it  wise  to  increase  the  amount  of  capital  in  the  United 
States?    Why? 

6.  Is  the  effective  desire  of  accumulation  stronger  in  Central 
or  South  America  ?    Why  ? 

7.  Distinguish  between  saving  and  hoarding,  and  the  effect  of 
each. 

8.  Is  the  miser  or  the  spendthrift  the  more  useful  member  of 
society?    Why?    Who  is  more  useful  than  either ?    Why? 

9.  Speaking  of  the  Galveston  flood,  a  writer  said :  "Fortunately, 
such  events  are  not  unmixed  evils.  Employment  will  now  be  found 
for  many  laborers,  and  this  benefit  should  not  be  forgotten  or  mini- 
mized by  us."    What  do  you  think  of  the  statement? 

10.  Is  a  football  celebration  which  results  in  the  breaking  of  $200 
worth  of  windows  advantageous  to  the  cause  of  labor?  Apply  the 
principle  here  involved  to  society  in  general. 

11.  What  would  happen  if  there  should  be  too  much  saving? 

12.  Criticize  the  following :  "Doubtless  the  best  thing  to  do  about 
the  spendthrifts  is  to  do  nothing  —  not  even  to  worry  about  their 
waste  of  money.  Their  waste  of  money,  in  fact,  is  the  least  silly 
thing  they  do,  for  the  money  is  in  constant  flux,  and  serves  its  pur- 
pose." 

SUPPLEMENTARY  READING 

Carver,  T.  N.     Principles  of  Political  Economy,  Chap.  XIII. 

Clay,  H.    Economics,  Chap.  V. 

Ely,  R.  T.     Outlines  of  Economics,  Chap.  VIII. 

Fetter,  F.  A.     Principles  of  Economics,  Chaps.  XX,  XXII. 

Fisher,  I.     The  Nature  of  Capital  and  Income,  Chaps.  V,  VI. 

Marshall,  A.     Principles  of  Economics,  Book  IV,  Chaps.  VIII,  IX. 

Mill,  J.  S.     Principles  of  Political  Economy,  Chap.  V. 


CHAPTER  XXI 

Capital  and  Surplus  Wealth 

I.   Nature  of  surplus  wealth 
i.   Its  meaning: 

a.  Individual  surplus 

b.  Social  surplus 
2.    Its  causes: 

a.  Cooperation : 

(i)  The  early  method  . 
(2)  The  present  method 

b.  Growth  of  population 

c.  Advance  of  civilization 

II.   Effects  of  surplus  wealth 

1 .  When  unduly  centralized 

2.  When  widely  distributed: 

a.  On  goods  and  prices 

b.  On  education 

c.  On  leisure 

d.  On  recreation 

e.  On  city  life 
/.  On  capital 

3.  The  conclusion 

Nature    of    Surplus    Wealth.  —  Intimately    connected 

with  the  subject  of  capital  is  the  problem  of  surplus  wealth. 

In  fact,  surplus  wealth  is  the  starting  point  of 

meaning:       capital.     In   order    that    wealth    may   produce 

individual     more  wealth,  part  of  the  original  wealth  must 

surplus.  .  . 

be  set  aside  for  purposes  of  future  production. 
The  difference  between  the  wealth  produced  and  the  wealth 


Capital  and  Surplus  Wealth  201 

consumed  is  surplus  wealth.  All  of  this  surplus,  however, 
may  not  be  devoted  to  future  production.  Part  of  it 
may  later  be  wasted,  or  be  finally  used  up  in  some  un- 
productive manner.  The  residue  of  the  surplus  which  is 
actually  used  to  assist  in  future  production  constitutes 
the  fund  from  which  capital  is  drawn.  The  individual 
surplus  is  that  part  of  the  total  surplus  which  has  been 
accumulated  largely  through  the  individual's  own  labor 
in  conjunction  with  the  other  two  factors  of  production. 
In  primitive  times,  for  example,  practically  all  the  surplus 
wealth  created  was  an  individual  surplus,  because  land  was 
largely  free  and  whatever  capital  existed  was  extremely 
crude.  But,  where  primitive  peoples  lived  communis tically, 
even  this  individual  surplus  was  socially  appropriated. 

In  modern  times  the  conditions  of  production  have 
altogether  changed.  The  simple  relationship  between 
man  and  nature  no  longer  exists,  and,  in  addi-  social 
tion  to  this  fact,  large  masses  of  capital  are  surPlus- 
already  accumulated.  Men  now  work  together  in  large 
groups,  so  that  most  of  the  wealth  created  can  no  longer 
be  said  to  be  the  result  of  merely  individual  labor.  Modern 
wealth  is  distinctly  social  in  character ;  the  group,  as 
a  whole,  plays  a  predominating  part  in  its  production. 
Therefore,  just  as  primitive  man  by  individual  effort  may 
produce  a  surplus  of  goods  over  and  above  what  he  requires 
for  daily  life,  so  society,  through  some  form  of  social  action, 
may  produce  a  vast  surplus  of  goods  beyond  what  is  needed 
for  present  consumption.  Hence  this  surplus  of  products, 
the  result  of  social  rather  than  individual  action,  may  be 
said  to  be  a  social  surplus.  Not  all  of  this  social  surplus 
is  capital,  however,  because  only  part  of  it  may  be  used 
to  aid  in  future  production. 


202  American  Economic  Life 

In  the  creation  of  surplus  wealth  society  plays  its  part 
either  through  cooperation,  or  through  the  growth  of 
its  causes:  population,  or  through  the  general  advance  of 
Cooperation,  civilization.  In  the  first  place  surplus  wealth 
is  the  result  of  cooperation.  Men  working  together  can 
produce  vastly  more  than  men  working  singly.  An 
example  of  this  may  be  seen  in  the  production  of  any 
ordinary  commodity,  such  as  nails.  Formerly,  each  nail 
was  hammered  out  on  an  anvil  by  the  strong  arm  of  an 
artisan ;  now,  a  long  wire  runs  into  one  end  of  a  machine 
and  comes  out  of  the  other  in  the  form  of  a  finished  nail. 
This  change  in  method  has  had  a  marvelous  effect  on  the 
output.  Fifty  years  ago  one  man  might  hammer  out  a 
hundred  nails  an  hour ;  to-day,  by  changing  the  method 
of  production,  a  swift-moving  machine  produces  thousands 
of  nails  in  the  same  time. 

This  change  in  method  is  based  on  cooperation.  Men 
work  together  in  groups  and  then  these  groups  work  to- 
gether. One  set  of  men  make  iron  ore  into  steel ;  another 
set  make  iron  and  steel  into  the  nail-making  machine ; 
another  make  the  belts,  the  screws,  and  the  gears ;  still 
another  transport  these  products  to  one  central  place,  the 
factory ;  and  now,  all  being  ready  and  a  million  hands 
having  assisted  in  bringing  the  steel  wire  and  the  machine 
together,  the  machine  produces  a  flood  of  nails  which 
find  their  way  into  the  home,  the  office,  and  the  factory. 
All  this  has  been  accomplished  because  of  the  principle  of 
cooperation,  which  asserts  that  two  men  working  together 
can  produce  more  than  twice  as  much  as  each  man  working 
separately. 

In  the  second  place,  surplus  wealth  results  from  an  in- 
crease in  value  brought  about  by  social  action  in  the  form 


Capital  and  Surplus  Wealth  203 

of  the  growth  of  population.  This  is  clearly  seen  in  the 
case  of  land  values.  The  value  of  land  rises  with  the 
growth  of  population  and  the  consequent  demand  Growth  of 
for  land  and  its  products.  The  lot  in  the  heart  Population. 
of  a  populous  city,  or  the  fertile  farm  feeding  a  growing 
population,  is  many  times  more  valuable  to-day  than  a 
hundred  years  ago.  This  increase  in  value  has  been 
brought  about,  not  by  any  one  individual,  but  by  collective 
action  of  the  whole-  social  group.  Therefore,  increased 
land  values,  not  due  to  individual  improvements  but  result- 
ing from  social  activity,  are  social  values  and  constitute  a 
part  of  the  surplus  wealth  of  society.  While,  under  our 
present  system,  they  may  enrich  the  individual  owners, 
they  are,  nevertheless,  created  by  society. 

Finally,  surplus  wealth  is  due  to  advancing  civilization. 
No  invention  is  the  work  of  one  man,  but  the  final  triumph 
of  a  long  line  of  preceding  inventions.  Pro-  Advance  of 
cesses,  systems  of  work,  railroads,  streets,  —  ctmUzatton. 
in  fact  the  whole  fabric  of  society,  —  are  begun  by  one 
generation  and  handed  on  to  the  next.  Thus  each  suc- 
ceeding generation  enjoys  the  benefit  of  surplus  wealth 
previously  created.  Adding  its  own  contribution  to 
this  heritage,  it  then  passes  the  fabric  on  to  its  successor. 
In  this  manner  future  generations,  securing  vast  returns 
from  a  system  to  which  they  contributed  nothing,  enjoy 
great  quantities  of  surplus  wealth. 

Effects  of  Surplus  Wealth.  —  Society  has  thus  come  to 
possess  a  vast  amount  of  surplus  wealth  over  and  above 
the  actual  requirements  of  present  consumption.  0 

When  we  consider  the  United  States  alone,  the  unduly  cen- 
extent  of  this  surplus  is  valued  in  billions  of  tralized- 
dollars.    The  period  following  the  Civil  War  was  one  of 


204  American  Economic  Life 

marvelous  industrial  expansion,  which  culminated  in  the 
abundant  national  prosperity  of  the  late  nineteenth  cen- 
tury. This,  of  course,  was  brought  about  by  individual  as 
well  as  group  action ;  but  the  social  factors  of  cooperation, 
growth  of  population,  improved  processes  of  production, 
and  perfected  organization  of  industry  played  the  domi- 
nating part  in  the  creation  of  this  surplus  wealth.  The 
tendency,  however,  of  this  surplus  was  to  become  rela- 
tively centralized  in  the  hands  of  a  small  group  of  people 
who  thus  exercised  great  economic  and  political  power 
over  the  community.  The  advantages  that  might  have 
accrued  to  the  community,  through  this  great  increase  in 
wealth,  were  therefore  largely  confined  to  the  small  group 
controlling  the  surplus. 

When  this  surplus  is  widely  distributed  throughout 
society,  the  effects  are  entirely  advantageous  to  the  com- 
When  munity.     The  most  direct  effect  of  this  surplus, 

tributed^8"  ^  ^  could  be  legitimately  diffused  throughout 
On  goods  American  society,  would  be  seen  in  the  quality, 
and  prices.  qUantity,  and  prices  of  goods  consumed  by  the 
people.  A  better  grade  of  goods  would  be  produced  in 
larger  quantities  at  cheaper  prices.  For  example,  the 
natural  effect  of  an  improved  process  of  making  shoes 
should  be  to  increase  the  output  and  to  lower  the  price  of 
shoes  to  the  advantage  of  all  who  wear  them.  This 
process  of  bettering  quality,  increasing  amount,  and 
decreasing  price  should  continue  until  every  member  of 
the  community  has  an  opportunity  to  secure  enough 
economic  goods  to  maintain  an  efficient  standard  of  living. 

The  surplus  wealth  of  society  may  also  make  itself 
felt  in  other  less  direct  ways.  For  example,  when  there 
is  a  great  mass  of  social  wealth  in  a  community,  society 


Capital  and  Surplus  Wealth  205 

may  offer  opportunities  for  individual  improvement  other- 
wise unattainable.     In  our  large  cities  this  advantage  is 
frequently  seen  in  the  great  number  of  publicly  0n 
or    privately   endowed   lecture   halls,    libraries,  education- 
museums,  schools,  and  colleges,  which  open  to  the  average 
man  and  woman  lines  of  work  hitherto  unattainable. 

Likewise,  the  surplus  makes  possible  wide  opportunities 
for  leisure  and  recreation.  In  modern  life  leisure  is  essen- 
tial. Leisure  does  not  mean  idleness,  but  time  0n 
in  which  men  are  free  to  do  as  they  desire.  The  leisure- 
nail  machine  has  its  advantage  in  increased  output;  its 
disadvantage,  in  monotony  and  sameness.  Since  his  work 
is  largely  mechanical,  the  man  who  tends  this  machine 
learns  very  little.  Therefore,  if  such  a  man  is  to  live  a  full, 
rounded  life,  he  must  have  leisure,  —  free  time  in  which  to 
walk  and  read  and  think. 

Through  the  shorter  working  day,  surplus  wealth  makes 
leisure  possible.  Surplus  wealth  results  in  surplus  time. 
Part  of  this  time  should  be  devoted  to  recrea-  0n 
tion,  —  to  activities  of  a  relaxing  nature  which  recreation. 
require  neither  concentrated  thought  nor  monotonous 
movement.  In  the  country,  recreation  is  easily  had ;  but 
in  the  city,  opportunities  for  recreation,  unless  created  in 
the  form  of  parks  and  playgrounds,  are  extremely  limited. 
Therefore,  the  surplus  wealth  of  society  should  provide 
the  community  with  opportunities  which  will  prove  ade- 
quate substitutes  for  the  lost  recreation  facilities  of  country 
and  village  life. 

It  is  evident,  therefore,  that  this  surplus  should  have 
a  decided  effect  upon  the  conditions  of  city  life.  This 
wealth  of  society  should  be  diverted  into  various  channels. 
Not  only  should  recreation  facilities  be  provided,  but  the 


206  American  Economic  Life 

city  should  be  made  beautiful.  In  this  respect,  America 
has  much  to  learn  from  Europe.  Public  architecture 
On  city  should    be    of    the    finest    character.      Streets 

We-  should  be  widened,  trees  planted,  symmetry  in 

architecture  maintained,  and  every  effort  made  to  beautify 
the  city. 

Finally,  surplus  wealth,  when  widely  distributed,  will 
have  a  marked  effect  upon  the  increase  of  capital.  We  have 
0n  seen  that  surplus  wealth  is  the  starting  point 

capital.  0f  capital.     In   early  days,   when  wealth  was 

scarce,  this  starting  point  was  difficult  of  attainment. 
The  hard-fisted  man  was  in  great  demand  because  it  was  only 
through  stinting  and  close  living  that  capital  was  amassed. 
But  with  the  growth  of  surplus  wealth,  man  need  not 
necessarily  lower  his  standard  of  living  in  order  to  create 
a  fund  of  capital.  In  fact,  the  more  man  consumes  wisely, 
the  greater  will  be  his  productive  power.  Through  in- 
creased consumption,  made  possible  by  surplus  wealth, 
man  will  increase  his  efficiency  and,  thereby,  add  his 
quota  to  the  surplus  wealth  from  which  capital  is  drawn. 
Thus,  surplus  wealth,  by  decreasing  the  necessity  for  ab- 
stinence, will  cause  men  to  realize  more  and  more  that 
efficiency,  not  parsimony,  is  the  key  to  individual  as 
well  as  social  welfare. 

When  we  realize  the  benefits  to  society  that  accrue  from 
a  wide  distribution  of  its  surplus  wealth,  it  becomes  im- 
The  portant  to  inquire  whether,  with  justice  to  all 

conclusion,  individuals,  this  surplus  may  not  be  more 
generally  diffused  throughout  the  community.  Without 
disturbing  the  right  of  private  property  and  the  correspond- 
ing right  of  the  individual  to  amass  a  large  fortune,  is  it 
not  possible  for  wealth  that  is  distinctly  social  in  character 


Capital  and  Surplus  Wealth  207 

to  be  partially  shared,  through  some  legitimate  method, 
by  all  members  of  the  community.  For  example,  this 
diffusion  of  surplus  wealth  has  already  been  partly  accom- 
plished by  philanthropists,  who  voluntarily  return  to  the 
community  its  wealth  in  the  form  of  libraries,  universities, 
and  other  public  institutions.  Again,  far-seeing  employers 
distribute  this  wealth  among  the  workers  in  the  form  of 
higher  wages  and  greater  participation  in  profits.  In 
addition  to  these  voluntary  methods  of  sharing  surplus 
wealth,  there  are  also  other  means  of  distributing  the 
surplus  through  the  demands  of  labor  organizations  and 
through  changes  in  our  system  of  wealth  distribution. 
But  by  far  the  simplest  method  of  sharing  this  surplus  is 
accomplished  through  taxation.  The  income  tax  and  the 
inheritance  tax  constitute  two  effective  means  of  returning 
to  society  the  wealth  that  social  action  has  been  largely 
instrumental  in  creating. 

QUESTIONS  FOR  RECITATION 

1.  Define  surplus  wealth.     Give  examples. 

2.  Explain  the  difference  between  individual  surplus  and  social 
surplus. 

3.  What  change  in   methods  of   production  has  made  surplus 
wealth  possible  ?     Show  how  the  new  method  differs  from  the  old. 

4.  What  are  two  other  causes  of  surplus  wealth?     Explain  the 
part  played  by  each. 

5.  Explain  the  effects  of  surplus  wealth  when  it  is  highly  cen- 
tralized in  the  hands  of  a  comparatively  few  individuals. 

6.  Explain  the  effects  of   surplus  wealth  when  it  is  widely  dis- 
tributed throughout  the  community. 

7.  Explain   how  philanthropists   return   surplus   wealth   to   the 
community. 

8.  How  do  far-seeing  employers  handle  the  problem  of  surplus 
wealth? 


208  American  Economic  Life 

9.   Explain  clearly  how  this  surplus  may  be  returned  to  the 
community  through  taxation. 

10.   Mention  some  more  radical  measures  of  distributing  surplus 
wealth.     Show  the  objections  to  these  measures. 

PROBLEMS  FOR  DISCUSSION 

1.  What  are  "socially  created  values"? 

2.  What  relation  exists  between  cooperation  and  surplus  wealth? 

3.  Explain  why  cooperation  can  accomplish  more  than  indi- 
vidual action. 

4.  What  factors  lead  men  to  cooperate? 

5.  What    may   surplus  wealth    mean   to    the    individual?     To 
society  ? 

6.  What  is  the  relation  between  population  growth  and  the  social 
surplus  ? 

7.  How  may  the  surplus  affect  prices?     Production? 

8.  What  relation  does  surplus  wealth  bear  to  education?    Lei- 
sure ?     Recreation  ?     City  life  ? 

9.  Why  was  the  old  concept  of  saving  absolutely  necessary? 

10.   How  is  this  concept  altered  by  the  presence  of  large  surplus 
wealth  ? 

SUPPLEMENTARY  READING 

George,  H.     Progress  and  Poverty. 

Hobson,  J.  A.     The  Evolution  of  Modern  Capitalism. 

Patten,  S.  N.     Dynamic  Economics. 

Patten,  S.  N.     Product  and  Climax. 

Seligman,  E.  R.  A.     The  Income  Tax. 

Smart,  W.     The  Distribution  of  Income. 

West,  M.     The  Inheritance  Tax. 


CHAPTER   XXII 

American  Agriculture 

I.   Its  early  development 
i.   In  the  North 

2.  In  the  South : 

a.  The  agricultural  conditions 

b.  The  effect  of  the  cotton  gin 

3.  In  the  West : 

a.  Effect  of  steam  engine 

b.  Effect  of  public  land  policy 

4.  Importance  of  machinery  : 

a.  Early  agricultural  methods 

b.  Modern  improvements 

5.  The  final  result 

II.   Its  present  status 

1.  Importance  of  agriculture 

2.  Kinds  of  agriculture  : 

a.  General  farming 

b.  Production  of  cereals 

c.  Stock  raising 

d.  Dairying 

e.  Fruit  growing 

/.    Market  gardening 

3.  Agricultural  training 

We  have  now  examined  the  parts  played  by  land,  labor, 
and  capital  in  the  production  of  wealth.  We  have  seen 
that  in  all  three  of  these  respects  the  United  States  is  un- 
usually fortunate.  So  far  as  the  requisites  of  production 
are  concerned,  national  prosperity  and  individual  welfare 

209 


210  American  Economic  Life 

are  attainable  in  America.  What  use,  then,  has  the  United 
States  made  of  these  abundant  resources  of  land,  labor, 
and  capital?  Has  the  nation  neglected  its  opportunities, 
or  has  it  developed  a  system  of  wealth  production  in 
keeping  with  its  natural  possibilities?  This  question 
may  best  be  answered  by  an  examination  of  the  progress 
attained  in  American  economic  life  along  the  lines  of  agri- 
culture, industry,  and  transportation. 

Early  Development  of  Agriculture.  —  In  a  previous 
chapter  the  fundamental  physical  differences  between 
in  the  the  North  and  the  South  were  indicated.     The 

North.  Northern     environment,     with     its     thin    soil, 

mineral  deposits,  and  cold  climate,  made  an  industrial 
society  inevitable.  The  Northern  colonists  turned  nat- 
urally to  lumbering,  fishing,  commerce,  and  later  to 
mining  and  manufacturing.  But  even  here,  from  the 
earliest  days,  agriculture  was  also  developed,  furnishing 
the  colonists  with,  grain,  live  stock,  fruit,  and  general  farm 
products. 

The  South,  however,  was  the  natural  home  of  agriculture. 
Its  genial  climate  and  fertile  soil  led  the  early  colonists  to 
disregard  their  industrial  possibilities  and  turn 
South:  The  their  attention  to  the  cultivation  of  tobacco, 
lonmZf  rice'  indiS°>  and  cotton.  The  institution  of 
slavery  also  fostered  this  agricultural  develop- 
ment, and,  in  turn,  was  made  profitable  by  it.  While 
slave  labor,  because  of  its  lack  of  intelligence,  was  not 
particularly  suited  to  the  growing  of  tobacco,  it  was  never- 
theless well  adapted  to  the  cultivation  of  rice,  because  in 
the  rice  swamps  slave  labor  could  be  readily  worked  in 
gangs. 

In  the  cultivation  of  cotton,  however,  slavery  received 


American  Agriculture  211 

its  real  impetus.  In  1793  Whitney's  cotton  gin  made 
possible  a  mechanical  separation  of  the  cotton  seed  from 
the  fiber.  This  device  brought  about  the  growth  EStci  of 
and  manufacture  of  cotton  on  a  large  scale.  couongin. 
Cotton  cloth  ceased  to  be  expensive  because  the  gin 
cleaned  as  much  cotton  in  a  day  as  had  been  cleaned  for- 
merly by  hundreds  of  slaves.  In  this  manner,  cotton 
became  the  most  profitable  crop  of  the  Southern  planter 
because  it  could  be  grown  by  slaves  managed  on  the  gang 
system.  The  planters  increased  the  size  of  their  plan- 
tations, added  to  the  number  of  their  slaves,  and  extended 
the  cultivation  of  the  cotton  crop  from  Cape  Hatteras  to 
Texas.     The  South  had  crowned  her  king. 

Meanwhile,  a  parallel  agricultural  movement  was  pro- 
gressing in  the  West.     From  the  opening  of  the  Northwest 
Territory  to  the  settlement  of  Washington  and  InthcWest. 
Oregon,  the  land  west  of  the  Allegheny  Moun-   Efectoj 
tains  was  transformed  from  a  wilderness  into  an  stea™ 
agricultural  region.     In  the  early  part  of  the 
nineteenth  century,  because  of  the  impossibility  of  trans- 
porting grain  other  than  by  boat,  settlements  could  be 
made  only  along  the  rivers.     But,  with  the  advent  of  the 
steam  engine,  land  transportation  of  bulky  freight  became 
possible  and  the  West  was  peopled  and  developed  with 
lightning  rapidity. 

Another  important  factor  in  the  development  of  the 
West  was  the  ease  with  which  public  lands  were  secured. 
The  Federal  government,  abandoning  the  attempt  E~t  , 
to  amass  revenue  from  the  sale  of  these  lands,  public  land 
made  every  effort   to  induce   their  settlement 
and  cultivation.    As  a  result  of  this  policy,  the  pioneers 
pushed  from  the  Northwest  Territory  into  "  Louisiana/ ' 


212  American  Economic  Life 

"  Oregon,"  "  California,"  and  "  Texas."  They  cleared 
the  wilderness,  sold  their  claims,  and  then  moved  on  to  the 
next  bit  of  wild  land.  In  this  way,  the  great  acquisitions 
of  territory  were  brought,  one  by  one,  under  human  control 
and  made  an  integral  part  of  the  agricultural  wealth  of 
the  nation. 

No  factor  has  been  of  greater  importance  in  the  general 
development  of  American  agriculture  than  the  use  of 
importance  machinery.  At  the  beginning  of  the  nineteenth 
of  ma-  century,  the  farming  of  the  nation  was  done  with 

„   .       .      tools  little  better  than  those  used  by  the  Romans 

tLarly  agrt-  * 

cultural  in  the  days  of  Julius  Caesar.  Horses  were 
scarce ;  oxen,  expensive.  The  land  was  broken 
up,  and  crops  sown,  cultivated,  and  harvested  chiefly  by 
hand  power.  But  this  kind  of  labor  was  slow  and  costly, 
and  Yankee  ingenuity  was  called  upon  to  devise  labor- 
saving  appliances.  As  a  result,  machinery,  for  the  first 
time  in  human  history,  came  to  play  a  leading  role  in  the 
development  of  agriculture. 

The  first  successful  agricultural  machinery  in  America 
was  built  during  the  second  quarter  of  the  nineteenth 
Modem  im-  century,  and  was  perfected  toward  the  close  of 
provements.  j-ne  century.  The  land  is  now  plowed  by  a 
horse  plow  or  steam  plow;  the  grain  is  sown  by  a  drill 
which  not  only  spreads  the  fertilizer  but  covers  the  seed; 
the  crop  is  cultivated  and  the  harvest  reaped  by  machines 
especially  designed  for  the  work.  The  country  boy  need 
no  longer  leave  the  back-breaking  toil  of  the  farm  for  the 
stifling  air  of  the  factory.  The  factory,  in  the  form  of 
modern  machinery,  has  come  to  the  farm  and  makes 
bearable  the  life  of  the  agricultural  laborer. 

Based  on  science  and  bulwarked  by  mechanical  appli- 


American  Agriculture  213 

ances,  American  agriculture  has  developed  rapidly  during 
the  nineteenth  and  twentieth  centuries.  The  South  raises 
cotton,  tobacco,  rice,  sugar,  fruit,  and  vegeta-  The  final 
bles;  the  West,  grain,  fruit,  and  cattle;  while  result- 
the  East  is  devoted  to  general  farming  and  dairying  prod- 
ucts. I  In  three  hundred  years  American  agriculture  has 
grownfrom  infancy  to  splendid  maturity.  \ 

Present  Status  of  Agriculture.  —  The  United  States 
to-day  occupies  a  premier  position  in  the  field  of  agri- 
culture. Since  the  close  of  the  nineteenth  cen-  itsimpor- 
tury,  the  total  farm  output  of  the  country  has  tence- 
steadily  increased  until,  during  the  World  War,  it  reached 
an  estimated  value  of  twenty  billions  of  dollars.  No 
other  products  compare  with  these  in  value,  and  there  is 
no  other  single  group  of  industries  including  such  a  large 
proportion  of  workers.  The  dependence  of  labor  on 
agriculture  is  attested  by  the  fact  that,  in  normal  times, 
one-third  of  all  the  labor  employed  in  gainful  occupations 
in  the  United  States  is  engaged  in  some  form  of  agricultural 
pursuit.  A  shortage  of  labor  in  this  field  is  fraught  with 
more  danger  to  national  life  than  in  any  other. 

For    convenience    of    discussion    this    occupation    may 
be  divided  into    the  following  lines   of  work:  Kinds  of 
(1)  general  farming;   (2)  production  of  cereals;  agriculture: 
(3)  stock  raising ;    (4)   dairying ;    (5)  fruit  growing ;    and 
(6)  market  gardening. 

General  farming  is  an  occupation  usually  associated  with 
the  word  "  farmer."     The  general  farmer  raises  live  stock, 
has  a  small  dairy,  keeps  chickens  and  pigs,  raises  General 
some  fruit,  and,  if  near  a  market,  grows  a  small  farminz- 
amount  of  garden  produce.     As  "  jack  of  all  trades  and 
master  of  none,"  he  sometimes  fails  to  produce  large  or 


\ 


214  American  Economic  Life 

valuable  returns.  For  this  reason  the  general  farm  is 
gradually  giving  way  to  some  more  specialized  form  of 
agricultural  work. 

Of  these  specialized  agricultural  pursuits,  the  production 
of  cereals  is  by  far  the  most  important.  These  include 
Production  OOTll,  wheat,  oats,  barley,  rye,  rice,  and  buck- 
of  cereals.  wheat.  Of  these  the  most  important  are  corn 
and  wheat.  The  United  States  produces  twice  as  much 
corn  as  all  the  rest  of  the  world  put  together.  Its  region  of 
greatest  production  stretches  from  Ohio  to  Kansas,  and 
from  Kentucky  to  Wisconsin,  although  it  is  grown  in  the 
whole  area  from  the  Gulf  of  Mexico  to  the  Great  Lakes 
and  from  the  Atlantic  Ocean  to  western  Kansas.  While 
wheat  may  be  generally  grown  in  various  parts  of  the  United 
States,  its  area  of  greatest  production  is  found  in  the  upper 
Mississippi  Valley,  in  the  Middle  West,  and  in  Washington 
and  Oregon  on  the  Pacific  Coast.  The  belt  of  greatest 
importance  stretches  from  Texas  north  through  Oklahoma, 
Kansas,  Nebraska,  the  Dakotas,  and  Minnesota  into 
Canada.  The  World  War  stimulated  enormously  our 
production  of  both  wheat  and  corn,  and,  by  causing  us  to 
send  vast  shipments  of  wheat  abroad,  taught  us  the  value 
of  corn  for  table  purposes. 

Stock  raising  is  an  industry  largely  confined  to  the  middle 
Southwest.  Cattle  are  raised  on  the  ranches  of  Arizona, 
stock  transported  to  Kansas,  and  there  fattened  on 

raising.  fae  corn  iands>  Then  they  are  taken  to  St. 
Louis,  Omaha,  or  Chicago,  where  they  are  slaughtered, 
converted  into  various  packing-house  products,  and 
shipped  finally  to  all  parts  of  the  world.  On  the  Kansas 
farms,  hogs  also  are  fed  with  the  cattle,  fattened  on  the 
corn,  and  then  shipped  to  the  packing  houses. 


American  Agriculture  215 

Dairying,  which  sometimes  accompanies  stock  raising,  is 
usually  confined  to  the  neighborhood  of  great  cities.  The 
necessity  of  producing  dairy  products  within  .  .^ 
easy  reach  of  the  city  is  particularly  seen  in  the 
case  of  milk,  since  milk  cannot  be  transported  properly  for 
a  greater  distance  than  one  hundred  miles.  Butter,  how- 
ever, is  transported  from  the  Middle  West  to  all  parts  of 
the  country. 

Western  fruit  growing  was  originally  developed  to  fur- 
nish return  freight  for  the  emptied  refrigerator  cars.  The 
great  packing  houses  in  the  Middle  West,  ship-  Fruu 
ping  their  products  in  cars  to  the  Pacific  Coast,  mowing. 
were  unable  at  first  to  secure  for  them  any  suitable  return 
cargo.  However,  they  soon  discovered  that  this  coast 
was  peculiarly  suited  to  the  growing  of  showy  fruit.  Thus 
an  industry  was  developed  which  provided  the  empty  meat 
cars  with  a  splendidly  paying  return  shipment.  Then,  too, 
apples  and  Tokay  grapes  proved  to  be  good  paying  crops 
and  were  rapidly  introduced  from  Oregon  and  Southern 
California.  Fruit  has,  of  course,  always  been  grown  on  a 
small  scale  in  all  agricultural  districts. 

Market  gardening  has  developed  at  a  phenomenal  rate 
during  the  past  thirty  years.  Originally,  farmers  grew 
their  products  and  hauled  them  in  wagons  to  Market 
the  near-by  towns.  Now,  spinach,  lettuce,  ^arden^g. 
tomatoes,  and  other  green  vegetables  are  grown  in  the 
Southern  states  all  winter  long  and  shipped  by  fast  freight 
to  the  North.  These  products  not  only  bring  reasonable 
prices  to  Southern  farmers,  but  they  provide  city  con- 
sumers with  green  vegetables  throughout  the  whole  year. 
Meanwhile,  hothouses  have  been  constructed  in  the  North 
in  which  lettuce,  tomatoes,  cucumbers,  beans,  and  other 


i 


xl 


216  American  Economic  Life 

green  products  are  grown  with  considerable  profit.  The 
rapid  increase  of  city  population  has  thus  been  followed 
by  the  development,  all  along  the  Atlantic  seaboard,  of 
market  gardening  on  a  large  scale. 

During  the  last  half  century  the  American  people  have 
developed  and  perfected  so  many  new  agricultural  methods 
Agricultural  that  agriculture  itself  has  been  placed  on  the 
training.  basis  of  modern  industry.  In  bringing  about 
this  result,  the  agricultural  school  has  played  an  important 
part.  Formerly,  the  farmer  was  an  untrained  man.  The 
knowledge  he  possessed  was  inadequate  and  traditional. 
To-day,  however,  on  the  farms  of  the  Middle  and  Far  West 
there  are  many  thousands  of  men  who  have  taken  technical 
courses  in  agriculture.  These  men  are  trained  in  the 
modern  science  which  has  revolutionized  agriculture  as 
well  as  industry,  and  are  equipped  with  a  knowledge  of 
business  methods.  Upon  men  of  this  character  depends 
our  future  agricultural  progress. 

QUESTIONS   FOR  RECITATION 

i.   Explain  why  the  North  is  not  preeminently  agricultural. 
Why  it  is  preeminently  industrial. 

2.  What  does  the  South  produce?     Why? 

3.  Why  was  slavery  profitable  in  the  South,  but  not  in  the 
North? 

4.'  Why  did  not  the  cotton  gin  decrease  the  need  for  slave  labor? 

5.  What  factors  developed  agriculture  in  the  West?  Explain 
each. 

6.  Explain  early  methods  of  agriculture  in  the  United  States. 

7.  Show  the  importance  of  modern  agricultural  machinery. 

8.  Name  the  chief  products  of  the  East,  South,  and  West. 

9.  Why  is  agriculture  a  basic  industry? 

10.  Name  the  chief  kinds  of  agricultural  work  in  the  United 
States.     Explain  what  you  mean  by  each. 


American  Agriculture  217 

11.  Why  is  the  general  farmer  turning  more  of  his  attention  to 
specialties  ? 

12.  Name  the  chief  areas  of  corn  and  wheat  production  in  the 
United  States. 

13.  What  parts  of  the  country  are  most  interested  in  stock  rais- 
ing? 

14.  Where  is  the  center  of  dairying?     Of  fruit  growing?    Of 
market  gardening  ? 

15.  Why  is  agricultural  training  important? 

PROBLEMS   FOR  DISCUSSION 

1.  What  causes  make  it  possible  for  the  percentage  of  our  popu- 
lation engaged  in  agriculture  to  decrease  ? 

2.  Why  have  many  people  left  the  farms  for  other  pursuits? 
Is  this  migration  likely  to  continue  ? 

3.  Agricultural  experts  tell  us  that  by  using  present  amounts 
of  labor,  land,  and  capital  according  to  the  most  effective  plans  of 
agricultural  production  already  known,  the  productive  efficiency 
in  this  industry  could  be  doubled  in  a  year.  Why  is  this  not  done? 
What  forces  are  working  in  this  direction? 

4.  Why  should  the  forces  of  custom,  habit,  and  inertia  be  stronger 
in  agriculture  than  in  other  pursuits  ? 

5.  What  functions  do  you  think  the  agricultural  colleges  per- 
form? 

6.  When  good  means  of  transportation  opened  up  markets  for 
the  produce  of  the  Western  pioneers,  what  changes  took  place  in 
agricultural  production? 

7.  Under  what  conditions  are  we  apt  to  have  diversified  farm- 
ing ?     Single-crop  farming  ? 

8.  What  is  the  difference  between  extensive  and  intensive  agri- 
culture ? 

9.  Why  is  agriculture  in  Europe  more  intensive  than  in  the 
United  States? 

10.  If  you  were  to  take  up  agriculture  as  a  profession,  what 
branch  would  you  select  ?    Why  ? 

11.  What  was  the  effect  of  the  World  War  upon  our  agricultural 
development  ? 


218  American  Economic  Life 

12.  What  danger  did  agriculture  face  when  this  war  was  over? 

13.  Is  agriculture  to-day  yielding  a  diminishing  return? 


SUPPLEMENTARY  READING 

Bulletins.     United  States  Department  of  Agriculture. 
Bulletins.     State  Agricultural  Departments. 

Harwood,  W.  S.     The  New  Earth,  Chaps.  IX,  XI,  XII,  XIX,  XX. 
Smith,  J.  R.     Commerce  and  Industry,  Chap.  I. 
Warren,  G.  F.    Elements  of  Agriculture,  Chaps.  VII,  XVI,  XVII, 
XVIII. 


CHAPTER  XXIII 

The  Problem  of  Soil  Fertility 

I.   How  the  soil  is  exhausted 
i.   Why  fertility  is  important 

2.  Causes  of  soil  exhaustion  : 

a.  The  "one  crop"  system : 
(i)  Examples 

(2)  Evil  results 

b.  Lack  of  " humus" 

c.  Waste  of  manure  : 

(1)  Examples 

(2)  The  estimated  loss 

3.  The  result 

II.   How  fertility  may  be  restored 

1.  The  essential  elements 

2.  Means  of  soil  conservation : 

a.  The  fertilizers : 

(1)  Chemical  fertilizers 

(2)  Animal  products 

(3)  Barnyard  manure 

b.  Cover  crops : 

(1)  Their  meaning 

(2)  Their  purpose 

(3)  Value  of  "legumes" 

3.  The  outlook 

How  the  Soil  is  Exhausted.  —  Intimately  connected 
with  the  subject  of  agriculture  is  the  problem  of  soil 
fertility.  We  have  seen  that  land  is  inherently  subject  to 
the  law  of  diminishing  returns,  and  that,  consequently, 
the  longer  the  soil  is  worked  the  less  is  likely  to  be  its 

219 


220  American  Economic  Life 

fertility.  Hence  the  question  of  maintaining  the  produc- 
tivity of  the  soil  becomes  of  paramount  importance.  Man 
Wh  must  combat  the  tendency  of  land  to  yield  a  de- 

fertiiity  is      creasing  return.     But,  in  spite  of  this  necessity, 

important.        , .     ,  . 

little  attention  has  been  given,  until  recently, 
to  the  conservation  of  soil  fertility  in  the  United  States. 
In  this  country  rich  soil  has  been  so  abundant  that  man, 
rather  than  spend  time  and  effort  upon  the  conservation 
of  a  particular  soil,  has  simply  moved  from  land  of  diminish- 
ing fertility  to  one  of  increasing  return. 

Through  carelessness  or  ignorance,  the  American  farmer 
has  often  unnecessarily  exhausted  the  fertility  of  the  soil. 
Causes  of  This  exnaustion  has  resulted  chiefly  from  the 
soil  ex-  "  one  crop  "  system,  from  the  lack  of  "  humus," 
_,   ,  and  from  the  waste  of  manure.     The  one  crop 

The      one  m  .         . 

crop  "  system,  used  for  years  in  the  South,  is  disastrous 

to  soil  fertility.  There,  the  same  piece  of  land, 
year  after  year,  was  used  for  growing  tobacco  or  cotton, 
and,  when  the  planter  began  to  notice  a  decreased  return, 
he  simply  moved  to  another  fertile  spot  which  he  likewise 
devoted  to  the  exclusive  production  of  one  crop.  If, 
instead  of  confining  his  production  to  this  crop,  the  farmer 
had  practiced  scientific  rotation  of  crops,  the  soil  might 
have  retained  its  fertility  almost  indefinitely. 

The  one  crop  system  has  two  evil  results.  In  the  first 
place,  it  causes  the  soil  to  be  exhausted  of  that  particular 
element  required  to  grow  the  special  crop,  so  that  even- 
tually the  cultivation  of  the  crop  on  that  land  will  have 
to  be  abandoned.  In  the  second  place,  the  insect  enemies 
and  bacteria,  which  prey  upon  that  crop,  will  multiply  to 
an  alarming  extent  and  ultimately  prove  disastrous  to  its 
cultivation. 


The  Problem  of  Soil  Fertility  221 

Again,  soil  exhaustion  has  resulted  from  the  lack  of 
"  humus."  Humus  is  decayed  organic  matter.  It  is 
essential  to  fertility  because  it  loosens  the  soil,  Lack  of 
permits  the  entrance  of  air  and  sunlight,  holds  "  humus" 
moisture,  and  finally  furnishes  food  elements  for  plant 
growth.  This  humus  has  been  provided  by  nature  through 
the  leaves  of  trees  and  other  natural  products.  By  cutting 
down  trees  and  destroying  plant  life,  man  has  often  removed 
the  source  of  humus. 

Another  reason  for  soil  exhaustion  is  found  in  the  waste 
or  disuse  of  manure.  Sometimes,  when  manure  piles 
become  so  large  as  to  be  in  the  way,  a  farmer  waste  of 
simply  removes  his  barn,  the  thought  of  using  manure- 
the  manure  as  fertilizer  never  entering  his  head.  In  the 
abandoned  farms  of  New  England,  we  find  a  less  ex- 
treme but,  unfortunately,  more  general  instance  of  the 
failure  to  utilize  manure  properly.  For  generations, 
the  New  England  farmer  planted  his  crops,  —  hay  and 
grain,  —  cut  them,  fed  part  of  them  to  his  cattle  and  horses, 
and  shipped  the  remainder  to  town.  The  part  which  he 
fed  to  his  stock  was  returned  to  the  land  in  the  form  of 
stable  manure.  But  this  manure,  while  piled  up  in  the 
barnyard  for  several  months  of  the  year,  was  depleted  of 
its  liquid  portion  and  of  that  portion  which  leached  out. 
Thus  the  farmer  each  year  returned  to  the  soil  less  than 
he  had  taken  from  it. 

Some  idea  of  the  loss  entailed  by  this  waste  may  be 
gained  from  an  estimate  made  by  the  United  States 
Department  of  Agriculture.  This  department  estimated 
that  $250,000,000  represented  the  annual  loss  resulting 
from  the  failure  to  utilize  manure  efficiently.  This  loss 
might  be  prevented  simply  by  conducting  the  liquid  to 


222  American  Economic  Life 

cement  pits  on  cement  floors,  instead  of  permitting  it  to 
run  off  into  the  barnyard. 

As  a  result  of  this  carelessness  or'ignorance  of  the  Amer- 
ican farmer,  the  soil  of  the  United  States,  in  certain  sections 
of  the  country,  is  being  unnecessarily  exhausted 

The  result.  J '  —*  .  .  . 

of  its  natural  fertility.  This  exhaustion  has 
been  taking  place  rather  rapidly  in  the  plantations  of  the 
South,  and  more  slowly  in  the  farms  of  New  England.  To- 
day, as  evidence  of  this,  great  stretches  of  land  lie  unused 
in  both  districts.  In  these  regions,  therefore,  the  law  of 
diminishing  returns  from  land  has  been  in  actual  operation, 
simply  because  man  has  not  cultivated  the  soil  in  accord- 
ance with  the  principles  of  scientific  farming. 

How  Fertility  May  Be  Restored.  —  In  addition  to  the 

practice  of  scientific  farming  and  the  proper  maintenance 

of  humus,   soil   fertility   depends   chiefly  upon 

X 116    cSScIl.- 

tial  ele-  the  presence  of  three  chemical  elements,  — 
nitrogen,  phosphorus,  and  potassium.  Of  these 
three  elements,  potassium,  which  is  found  generally  in  clay 
soils,  is  most  easily  obtained.  Nitrogen  is  secured  chiefly 
through  ammonium  compounds,  while  phosphorus  exists 
in  bone  meal,  guano,  and  phosphate  rock.  The  mainte- 
nance of  soil  conservation  depends,  therefore,  largely  upon 
the  presence  of  these  three  elements  in  the  soil. 

To  maintain  these  essentials  either  chemical  fertilizers, 
animal  substances,  or  barnyard  manure  may  be  applied 
Means  of  to  the  soil ;  or  green  cover  crops  may  be  plowed 
sou  con-        under  to  act  as  fertilizer.     Chemical  fertilizers, 

servation : 

Theferti-       sucn  as  nitrate  of  soda,  muriate  of  potash,  and 
Uzers.  acjd   phosphate,    furnish   the   needed   chemical 

elements  without  providing  the  required  humus  for  the  soil. 
On  the  other  hand,  fertilizers  which  are  animal  products, 


The  Problem  of  Soil  Fertility  223 

like  ground  fish  and  dried  blood,  do  contain  organic  matter 
which  decays  in  the  soil.  Of  especial  value,  however,  are 
stable  manure  and  green  crops  used  as  fertilizers.  These 
possess  not  only  chemical  elements,  but  are  particularly 
valuable  for  their  humus.  While  stable  manure  is  very 
effective,  its  high  price  may  prevent  its  use  from  becoming 
general. 

On  the  other  hand,  green  or  cover  crops  are  cheap  and 
equally  effective.  A  cover  crop  is  a  crop  sown  with  the 
avowed  purpose  of  plowing  it  under  when  it 

Cover  crops. 

reaches  the  proper  stage.  The  farmer  sows 
this  crop  in  the  late  fall  and  lets  it  cover  the  ground  all 
winter,  because  he  knows  that  something  is  bound  to 
grow  on  his  land  during  the  late  fall  and  early  spring.  He 
prefers  to  have  a  crop  which  he  may  use  for  purposes  of 
fertilization,  rather  than  a  mass  of  weeds  which  will  stand 
in  the  way  of  cultivation.  Then  too,  in  midsummer, 
when  he  ceases  to  cultivate  corn,  the  wise  farmer,  instead 
of  allowing  weeds  to  grow  unchecked,  plants  a  cover  crop 
between  the  rows  of  corn.  These  crops  not  only  protect 
the  ground  from  the  fierce  rays  of  the  sun  and  thus  help  it 
to  hold  moisture,  but  they  also  develop  a  good  growth  of 
stalks  and  leaves  that  will  prove  invaluable  as  green  manure 
when  they  are  plowed  down  and  left  to  rot. 

Of  these  cover  crops  the  most  valuable  are  "  legumes," 
—  peas,  beans,  clover,  vetch,  rape,  and  alfalfa,  —  on  the 
roots  of  which  appear  small  bulbous  formations  containing 
ammonium  compounds  from  which  nitrogen  is  derived. 
These  nodules  are  the  product  of  bacteria  which  turn  air 
nitrogen  into  soil  nitrogen.  Through  few,  if  any,  other 
plants  can  the  free  nitrogen  of  the  air  be  converted  into 
nitrogen  that  may  be  utilized  by  plants  themselves.     These 


224  American  Economic  Life 

legumes,  therefore,  not  only  furnish  splendid  stalks  and 
leaf  growths  for  humus,  but,  in  addition,  fix  that  most 
expensive  of  the  fertility  elements,  nitrogen. 

Thus  it  may  be  seen  that,  in  America,  the  problem  of  soil 
fertility  is  not  difficult  of  solution.  While  it  is  true  that 
The  out-  many  sections  of  the  country,  through  ignorance 
look.  or  carelessness,  have  suffered  the  effects  of  soil 

exhaustion,  it  is  equally  true  that  these  same  regions,  by 
wise  care  and  management,  may  be  restored  to  their 
former  fertility.  It  is  likewise  evident  that  there  is  no 
necessity  whatsoever  for  the  soil  enjoying  present  fertility 
to  be  exhausted  of  its  fertile  qualities.  Scientific  farming, 
good  judgment,  and  increased  knowledge  are  the  factors 
essential  to  a  successful  solution  of  the  problem.  The 
agricultural  school  to-day  attempts  to  supply  the  farming 
population  with  this  increased  knowledge. 

QUESTIONS  FOR  RECITATION 

i.   Why  is  the  question  of  soil  fertility  becoming  increasingly 
important  ? 

2.  Can  you  give  any  examples  of   the  one-crop  system  in  the 
United  States  to-day?     State  its  evil  effects. 

3.  What  is  humus?     What  are  its  uses? 

4.  Explain  how  manure  is  wasted. 

5.  By  what  methods  may  manure  be  more  effectively  used? 

6.  What  are  the  results  of  soil  exhaustion? 

7.  Upon  what  chemical  elements  does  soil  fertility   depend? 
State  where  each  is  found. 

8.  Name  some  animal  products  that  are  good  fertilizers. 

9.  Why  are   manure   and   cover   crops   especially  valuable   as 
fertilizers  ? 

10.  What  are  cover  crops  ?     When  and  why  are  they  planted  ? 

11.  Name  the  legumes.     Explain  their  value  to  the  farmer. 

12.  What  is  meant  by  "scientific  farming"? 


The  Problem  of  Soil  Fertility  225 


PROBLEMS   FOR   DISCUSSION 

1.  Contrast  the  soil  of  the  United  States  to-day  with  the  condi- 
tion of  the  soil  in  the  early  nineteenth  century. 

2.  What  does  soil  exhaustion  involve? 

3.  Discuss  the  remedies  for  soil  exhaustion. 

4.  Explain  the  principle  of  rotation  of  crops. 

5.  Describe  the  means  that  nature  provides  for  the  maintenance 
of  humus  in  the  soil. 

6.  How  have  men  thwarted  nature's  means  of  humus  conser- 
vation ? 

7.  Describe  an  abandoned  farm  and  explain  fully  how  you  would 
restore  its  fertility. 

8.  What  does  your  own  state  do  to  maintain  or  improve  its 
soil  fertility? 

9.  What  does  the  United  States  do  in  this  direction? 

10.  Contrast  the  care  taken  of  the  soil  in  this  country  with  the 
work  in  this  direction  in  France  or  Holland. 

11.  To  what  extent  would  you  say  the  law  of  diminishing  returns 
is  at  work  in  the  United  States  ?     Explain  fully. 

12.  Is  this  tendency  likely  to  increase  or  decrease  in  this  country? 
Why? 

SUPPLEMENTARY  READING 

Annals    American    Academy.     Conservation    of   Natural   Resources, 

Parts  III  and  IV. 
Hall,  B.     A  Little  Land  and  a  Living. 

Harwood,  W.  S.     The  New  Earth,  Chaps.  I,  II,  in,  V,  XVIII. 
Hunt,  T.  F.     How  to  Choose  a  Farm. 
Warren,  G.  F.    Elements  0}  Agriculture,  Chaps.  IV,  V,  VI,  IX. 


CHAPTER  XXIV 
New  Forms  of  Plant  and  Animal  Life 

I.   The  process  of  selection 
i .   Artificial  selection : 

a.  Meaning  and  example 

b.  How  accomplished 

2.  Natural  selection : 

a.  Meaning  and  example 

b.  The  final  result 

3.  A  fundamental  difference 

II.   How  man  utilizes  selection 

1 .  In  changing  animal  life : 

a.  The  transformed  hog 

b.  Different  types  of  horses 

c.  The  modern  hen 

2.  In  changing  vegetable  life  : 

a.  The  new  variety  of  wheat 

b.  New  varieties  of  corn 

c.  New  fruits  and  vegetables 

3.  The  conclusion 

Another  problem  connected  with  agriculture  is  that 
furnished  by  the  conscious  production  of  new  forms  of  plant 
and  animal  life.  Formerly,  such  a  change  in  the  natural 
order  would  have  been  regarded  as  evidence  of  witchcraft, 
and  the  person  possessed  of  this  power  promptly  burned 
at  the  stake.  To-day,  however,  this  is  rightly  regarded  as 
one  of  the  triumphs  of  modern  agriculture. 

226 


New  Forms  of  Plant  and  Animal  Life        227 

The  Process  of  Selection.  —  Selection  is  either  artificial 
or  natural.     Artificial  selection  is  the  process  by  which  men 
perpetuate  or  destroy  certain  desirable  or  un- 
desirable characteristics  in  animals  and  plants,  selection: 
For  example,  the  cat,  belonging  to  one  of  the   Meaning 
most  ferocious  families  in  the  animal  kingdom,   and  A, 

0  J    example. 

was  originally  fierce  and  wild.     To-day,  it  is  so 

gentle  and  quiet  that  it  loves  to  be  played  with  and  caressed. 

It  has,  indeed,  become  the  plaything  of  children. 

How  has  this  wonderful  transformation  been  accom- 
plished? Simply  by  a  process  of  artificial  selection.  For 
centuries,  man  has  not  permitted  any  but  the  jjow  ac_ 
gentlest  cats  to  live.  In  this  manner,  the  comPlish^d- 
quiet  and  docile  cats,  generation  after  generation,  trans- 
mitted their  gentle  characteristics  to  their  kittens,  until 
to-day  we  have  the  domestic  pet  at  our  fireside.  By  a 
similar  process  other  domestic  animals  were  transformed 
from  wild  into  tame  creatures.  Man  selected  in  the  parents 
those  qualities  he  desired  in  the  offspring,  and  thus  deter- 
mined the  character  of  the  coming  generation. 

In  natural  selection  man  plays  no  part.     Natural  con- 
ditions determine   those   that   are   to   survive,   and   their 
qualities    are    thus    transmitted    to    their    off-  Natural 
spring.     For   example,   in   the   wilds   of   India,   selection: 
ferocity  is  essential  to  the  cat  family.     Survival  an™™8 
depends  on  this  quality.     Hence,  the  ferocious  ****&* 
tiger  survives,  while  the  less  ferocious  is  easily  killed  or 
starves  to  death.     In  this  manner  a  rigorous  process  of 
natural  selection  destroys  the  gentle  and  perpetuates  the 
fierce  qualities  required  in  the  tiger. 

By  the  process  of  natural  selection,  those  forms  of  life 
best  able  to  escape  enemies  in  their  particular  locality 


228  American  Economic  Life 

adapt  themselves  to  it,  and  survive.  But  thousands 
of  others,  not  so  well  adapted  to  their  environment,  are 
The  final  killed  in  their  struggle  for  existence.  A  good 
result.  sized  cod  lays  from  thirty  to  fifty  millions  of  eggs, 

but  only  a  few  of  those  that  are  hatched  ever  survive  to 
adult  life.  The  remainder  are  destroyed  by  the  cod's 
enemies  either  before  or  after  hatching.  Thus,  in  the 
course  of  centuries,  this  "  survival  of  the  fittest  "  produces 
a  creature  best  adapted  to  its  own  environment. 

Natural  and  artificial  selection  differ  in  one  fundamental 
respect.  The  former  is  unconscious ;  the  latter,  con- 
Afunda-  scious  and  deliberate.  Natural  selection  occurs 
mental  unknowingly,  without  the  intervention  of  any 

conscious  will,  while  artificial  selection  takes 
place  with  a  deliberate  end  in  view.  The  cod's  young  are 
accidentally  destroyed  by  their  hungry  enemies  who  have 
no  thought  of  developing  a  strong  type  of  codfish.  On  the 
other  hand,  the  fierce,  wild  cats  are  deliberately  killed  by 
man  in  order  to  produce  a  quiet,  gentle  type  of  cat. 

How  Man  Utilizes  Selection.  —  Through  artificial  selec- 
tion men  have  changed,  and  are  still  changing,  various 
forms  of  life  coming  within  their  power.  This 
life:  may  be  seen  both  in  the  animal  and  vegetable 

The  trans-      world.     Southdown  sheep  and  the  two-minute 

formed  hog.  .,,.,,. 

trotter  are  products  of  artificial  selection  just 
as  much  as  the  thornless  cactus  and  the  Burbank  potato. 
In  fact,  artificial  selection  has  revolutionized  animal  life. 
A  striking  instance  of  this  is  seen  in  the  transformation  of 
the  hog.  The  wild  mountain  hog,  with  his  sharp  back, 
raw-boned  body,  and  long  legs,  was  little  suited  to  the 
pork  market.  The  hog  breeder,  therefore,  proceeded  to 
change  this  scrawny,  razorback  creature  into  a  fat,  edible 


New  Forms  of  Plant  and  Animal  Life        229 

animal.  This  he  did  by  selecting  from  each  generation 
the  short-legged,  fat,  quiet  hogs  to  be  the  parents  of  the 
next  generation.  In  this  manner,  after  the  process  had 
continued  many  years,  a  type  of  hog  satisfying  all  the 
requirements  of  the  market  was  produced. 

With  horses  this  same  process  of  selection  has  been 
carried  on.     Some  horses  must  be  fast,  others  suited  to 
light  work,  and  still  others  capable  of  drawing 
the    heaviest     loads.     In    response    to     these  types  of 
demands,    horse   breeders,    by   proper    mating, 
have  finally  developed  fast  race  horses,  all-around  work 
horses,  and  draught  horses  of  great  bulk  and  strength. 

Chickens  have  likewise  been  transformed.  The  hen,  in 
her  wild  state,  laid  a  few  eggs  a  year  and  hatched  them 
all.  The  modern  hen  —  the  product  of  careful  The  modem 
artificial  selection  —  lays  ten  times  as  many  hen- 
eggs  in  the  course  of  a  year  and  may  even  be  induced  to 
refrain  from  setting.  The  value  of  this  increased  egg 
supply  is  obvious.  While  the  cost  of  raising  chickens 
remains  the  same,  the  additional  eggs  furnish  the  farmer 
with  increased  profits. 

Recently,  however,  the  most  remarkable  results  from 
artificial  selection  have  been  attained  in  the  development 
of    vegetable    rather    than    of    animal    species,  invege- 
Students  of  plant  life,  during  the  later  nineteenth  table  ufe: 
century,    created   many   new   vegetable   types.  vJietToj 
Consider,  for  example,  the  work  of  the  govern-  wheaL 
ment  experiment  stations  in  developing  a  new  variety  of 
cereal  capable  of  resisting  disease.     The  gravest  foes  of  the 
farmer   during  late  years   have  been  blight,   scale,   and 
similar  forms  of  plant  disease.     An  attempt  was  therefore 
made  to  develop  a  species  of  wheat  that  would  not  succumb 


230  American  Economic  Life 

to  blight.  Experiment  after  experiment  was  made  with 
this  end  in  view,  and  men  were  sent  all  over  the  world 
to  look  for  kinds  of  wheat  that  would  resist  blight.  Such 
a  type  of  wheat  was  finally  evolved.  At  the  same  time, 
experiments  were  being  made  on  the  drylands  of  the  West, 
where  the  rainfall  is  only  one-third  of  that  along  the  Atlantic 
plains.  Here,  the  land  being  fertile  and  the  water  scarce, 
a  kind  of  wheat  capable  of  resisting  drought  was  produced. 
Eventually,  by  careful  selection,  there  was  further  developed 
a  variety  of  wheat  not  only  requiring  little  moisture,  but 
also  comparatively  free  from  blight. 

The  corn  belt  in  the  Middle  West  furnishes  another 
interesting  example  of  the  results  of  selection.  The 
„  manufacturers  of  corn  oil  desired  a  corn  con- 

New 

varieties  taining  a  high  percentage  of  oil,  while  the  manu- 
factures of  certain  corn  food  found  a  low  per- 
centage of  oil  desirable.  To  meet  these  different  demands, 
experiments  were  made  on  a  certain  variety  of  corn  con- 
taining six  per  cent  of  oil.  As  a  result,  this  same  corn  in 
the  course  of  a  few  years  was  made  to  produce  one  variety 
containing  nine  per  cent  of  oil,  and  another  containing  two 
per  cent  of  oil. 

In  the  same  manner  the  principle  of  artificial  selection 
has  been  utilized  to  produce  new  kinds  of  fruits  and  vege- 
New  fruits  tables.  Burbank  displaced  the  red  potato  by 
and  the  artificial  white  one,  and  thus  realized  the 

vegetables.  .  r  -,  M  ■    « 

picture  of  a  potato  he  mentally  patterned  in 
1873,  —  "A  potato  with  a  better  flavor,  one  with  a  rela- 
tively larger  amount  of  sugar,  one  that  will  be  a  larger 
size  and  all  of  the  same  uniform  shape  and  size,  and  one 
that  will  better  resist  diseases  and  be  a  larger  yielder 
than  any  potato  now  known."     Through  the  same  means, 


New  Forms  of  Plant  and  Animal  Life        231 

the  splendid  market  tomato  has  been  evolved  from  a  weed ; 
the  luscious  Baldwin  is  the  descendant  of  the  thorn  apple ; 
and  Burbank,  in  the  near  future,  promises  a  seedless 
strawberry. 

Artificial  selection  has  thus  proved  one  of  the  most 
potent  forces  at  the  disposal  of  the  agriculturist.  Through 
it  he  has  been  enabled  to  revolutionize  his  The 
industry,  and  to  place  upon  the  market  multi-  conclusion, 
tudes  of  nutritious  vegetable  and  animal  products.  In 
industrial  life,  through  the  domestication  of  animals  and 
the  gradual  development  of  beasts  of  burden,  artificial  se- 
lection has  exercised  an  equally  potent  influence. 

QUESTIONS   FOR  RECITATION 

1.  Define  the  process  of  selection. 

2.  Explain   the   difference    between   artificial   and   natural   se- 
lection. 

3.  Give  examples  of  each  kind  of  selection. 

4.  Show  how  each  kind  of  selection  is  accomplished. 

5.  Explain  the  meaning  of  "the  survival  of  the  fittest."     Give 
examples. 

6.  What  is  the  purpose  of  artificial  selection? 

7.  Why  is  a  knowledge  of  artificial  selection  useful  to  the  modern 
farmer  ? 

8.  Explain  in  detail  what  artificial  selection  has  accomplished  in 
the  animal  world.     Give  illustrations. 

9.  Show  how  it  is  of  value  in  the  poultry  business. 

10.  What  has  artificial  selection  done  for  the  production  of  cereals? 

1 1 .  What  has  it  accomplished  in  the  fruit  and  vegetable  world  ? 

PROBLEMS  FOR  DISCUSSION 

1.  Discuss  the  meaning  of  evolution. 

2.  Apply  the  doctrine  of  evolution  to  the  development  of  man, 

3.  What  kind  of  selection  is  most  dominant  in  the  evolution  of 
primitive  man?    Of  modern  man?    Why? 


232  American  Economic  Life 

4.  Discuss  some  of  the  important  contributions  of  artificial  se- 
lection to  agriculture ;  to  civilization. 

5.  Can  you  cite  any  local  instances  of  the  selection  process? 

6.  Show  how  the   process   of  selection   operates   in   your  own 
school  life. 

7.  Explain  the  process  of  the  domestication  of  animals. 

8.  Discuss  the  meaning  of  eugenics. 

9.  What  may  eugenics  accomplish  for  the  human  race? 

10.   What  are  the  limitations  of  the  principle  of  artificial  selection 
when  applied  to  human  beings  ? 


SUPPLEMENTARY   READING 

Conklin,  E.  G.     Heredity  and  Environment. 
Darwin,  C.     Origin  of  Species. 

Harwood,  W.  S.     The  New  Earth,  Chaps.  IV,  VI,  VIII,  XVII. 
Schmucker,  S.  C.     Meaning  of  Evolution. 

Warren,  G.  F.    Elements  of  Agriculture,  Chaps.  I,  II,  VIII,  XI- 
XV. 


CHAPTER  XXV 

Early  American  Industry 

I.   Origin  of  American  industry 
i .   Kinds  of  industries 

2.  The  colonial  policy  : 

a.  Meaning  and  application 

b.  How  carried  out : 

(i)  By  industrial  restrictions 
(2)  By  commercial  regulations 

c.  Effect  of  this  policy 

3.  Condition  after  the  war  : 

a.  The  new  danger 

b.  The  proposed  remedy 

4.  Effect  of  War  of  181 2 

II.   The  Industrial  Revolution 

1.  The  "domestic  system" 

2 .  Inventions : 

a.  Their  importance 

b.  Their  effects : 

(1)  On  mechanical  power 

(2)  On  transportation  facilities 

(3)  On  labor-saving  devices 

3.  The  " factory  system"  : 

a.  Its  essential  features 

b.  Its  advantages : 

(1)  In  production 

(2)  In  consumption 

c.  Its  disadvantages 

Another   form  of   wealth  production   which  developed 
marvelously  in  the  nineteenth  century  is  found  in  the 

233 


234  American  Economic  Life 

realm  of  industry.  An  examination  of  American  economic 
life  will  show  that,  not  only  in  agriculture,  but  also  in 
manufacturing,  is  the  United  States  realizing  its  latent 
possibilities. 

Origin  of  American  Industry.  —  The  American  colonists 
found  open  to  them  three  kinds  of  industries.  In  the 
Kinds  of  nrst  place,  they  might  engage  in  the  primary 
industries,  industries,  such  as  lumbering,  mining,  and 
quarrying,  which  are  concerned  in  converting  natural 
resources  into  the  raw  materials  of  industry.  In  the  next 
place,  they  might  engage  in  the  secondary  industries,  which 
work  on  the  raw  or  semi-finished  products,  such  as  ship- 
building, iron  manufacturing,  and  the  manufacture  of 
woolen  goods,  hats,  clothing,  and  similar  articles.  Finally, 
the  American  colonists  might  engage  in  another  form  of 
industrial  activity,  —  commerce.  The  harbor  facilities, 
the  proximity  of  the  West  Indian  markets,  together  with 
the  development  of  industry  and  of  agriculture,  afforded 
every  opportunity  for  an  easy  exchange  of  commodities. 

Had  the  colonists  been  content  to  engage  only  in  the  pri- 
mary industries,  involving  the  production  of  raw  materials, 
The  they  might  have  escaped  coming  into  economic 

colonial  conflict  with  England.  According  to  the  general 
p°  cy.'  colonial    policy    of    the    seventeenth    century, 

Meaning  .  •         *     m  i  t        *      i  % 

and  colomes   existed   for   the   good   of   the   mother 

application.    country      ft  was  their  function  to  supply  raw 

materials  for  the  home  country  to  manufacture  and  sell 
back  to  them.  England  attempted  to  apply  this  theory 
by  requiring  the  colonies  to  produce  only  raw  materials, 
by  transporting  these  raw  products  in  her  own  ships  to  be 
manufactured  at  home,  and  by  carrying  back  in  her  own 
vessels  the  finished  products  to  be  sold  in  America.     In 


Early  American  Industry  235 

this  way,  the  English  manufacturer  and  merchant  made 
several  intermediary  profits. 

To  carry  out  this  policy  effectively,  England  resorted  to 
many  devices.  Since  manufacturing  involved  the  use  of 
machinery,  the  home  government  passed  acts  How  carried 
prohibiting  the  exportation  of  machinery  to  the  ouL 
colonies.  But,  despite  this  discouragement,  the  colonists 
journeyed  to  the  English  factories,  imported  some  labor, 
brought  in  an  occasional  drawing  or  pattern,  and,  above 
all,  proceeded  to  invent  their  own  implements.  England 
also  discouraged  American  industry  by  passing  acts  for- 
bidding the  colonies  to  manufacture  certain  goods  produced 
in  England.  This  prohibition  was  particularly  severe 
on  the  New  England  colonies,  where  every  effort  had  been 
made  to  encourage  industry. 

To  accomplish  its  end,  Parliament  further  passed,  toward 
the  close  of  the  seventeenth  century,  the  Navigation  Acts 
regulating  and  restricting  commerce.  Under  these  acts, 
the  monopoly  of  English  trade  was  to  be  held  by  Eng- 
lish ships  and  English  subjects.  As  the  colonists  began 
shipbuilding  at  an  early  date,  these  acts  struck  a  hard 
blow  at  a  rising  American  industry  and  a  growing  American 
commerce. 

The  effect  of  this  policy,  which,  it  must  be  remembered, 
was  the  general  colonial  policy  of  all  European  nations 
at  that  time,  was  to  accentuate  the  gradually  Effect  of 
growing  differences  between  the  colonies  and  the  this  policy- 
mother  country.  The  North  suffered  most  severely  from 
the  effects  of  this  narrow  policy  and  objected  most  stren- 
uously to  its  enforcement.  It  denied  to  the  inhabitants  of 
this  region  their  logical  occupations,  —  shipbuilding,  manu- 
facturing, and  commerce.    This  denial,  added  to  the  denial 


236  American  Economic  Life 

of  political  rights  to  the  colonists,  intensified  the  coming 
struggle  for  political  independence.  So  often  do  we  em- 
phasize the  political  side  of  this  struggle,  through  the  battle 
cry  of  "  taxation  without  representation  is  tyranny,"  that 
it  is  well  here  to  bear  in  mind  the  economic  factors  at  work 
in  the  separation  of  the  colonies  from  the  mother  country. 

While  the  Revolutionary  War  was  in  progress,  national 
industry  was  really  beginning.  The  English  blockade, 
Condition  following  the  declaration  of  war  and  continuing 
after  the  throughout  the  struggle,  forced  the  colonists 
The  new  themselves  to  manufacturing.  But  when  peace 
danger.  was  declared,  American  industry  faced  a  new 

peril.  For  years,  European  manufacturers  had  been 
stocking  up  goods  at  home.  When  the  war  was  over, 
these  goods  flooded  the  American  market.  Handicapped 
as  the  American  manufacturers  were  by  crude  machinery 
and  relatively  high-paid  labor,  they  were  unable  to  com- 
pete successfully  with  their  foreign  rivals. 

To  meet  this  situation,  the  American  manufacturer 
naturally  turned  to  some  form  of  legislative  protection. 
This  was  first  afforded  by  the  Tariff  Act  of 
proposed  1 789.  Soon  after,  Alexander  Hamilton,  Secre- 
tary of  the  Treasury,  made  a  strong  plea  for 
protection  in  his  famous  report  on  the  status  of  manu- 
factures. In  this  report,  he  took  the  position  that  "  cus- 
toms duties  "  must  be  levied,  if  the  "  infant  industries  " 
of  America  were  to  compete  successfully  with  the  estab- 
lished industries  of  Europe.  As  a  result  of  his  recommen- 
dation, the  rates  in  the  Tariff  Act  of  1789  were  increased  in 
1790,  and  again  in  1792.  In  this  manner  was  inaugurated 
that  policy  of  protecting  American  manufactures,  which, 
with  slight  interruptions,  has  continued  to  the  present  day. 


Early  American  Industry  237 

Another  factor  of  considerable  importance  in  the  early 
development  of  American  industry  was  the  situation 
brought  about  by  the  War  of  181 2.  This  Effect  of 
struggle  had  the  indirect  effect  of  stimulating  War  of  1812. 
manufacturing  in  the  United  States.  At  that  time  America 
was  still  largely  dependent  upon  England  for  the  bulk 
of  needed  manufactured  articles.  When  war  suddenly 
cut  off  this  supply,  the  young  nation  was  forced  to  depend 
more  and  more  upon  her  own  industrial  activities.  In 
this  manner  home  manufactures  were  stimulated,  just  as 
one  hundred  years  later  the  World  War  forced  the  United 
States  in  much  the  same  way  to  develop  new  dye  and 
chemical  industries. 

The  Industrial  Revolution.  —  Before  the  middle  of  the 
eighteenth  century,  industry  in  whatever  form  it  existed, 
both  at  home  and  abroad,  was  conducted  along 
extremely   simple   lines.     Its   seat   was   in   the  "domestic 
home,  where  it  was  closely  linked  with  the  life  system* 
of  the  family.     The  primitive  spinning  wheel  and  the  old- 
fashioned  hand  loom  were  the  chief  tools  of  production, 
while  the  labor  employed  was  made  up  of  members  of  the 
family  supplemented  by  a  few  outside  laborers  called  in 
for  special  purposes.     Goods  were  manufactured  at  home, 
by  hand,  with  the  assistance  of  a  small  group  of  family 
laborers.     This    method   of   manufacture    has,    therefore, 
been  called  the  "  domestic  system  "  of  industry. 

As  contrasted  with  this  early  method  of  manufacture, 
we  find  that,   to-day,  industry  is  highly  organized  and 
extremely  complicated.     This  change  has  been  inventions- 
wrought  by  the  Industrial  Revolution  of  the   Their  im- 
latter    half    of    the    eighteenth    century.     In  i>ortance- 
effecting  this  change,  inventions  have  been  of  paramount 


238  American  Economic  Life 

importance.  In  fact,  without  the  inventions  of  the  last 
one  hundred  and  sixty  years,  men  would  still  be  working 
singly  and  inefficiently.  Modern  industry  is  founded  on 
inventions.  Through  them  machinery  has  come  to  the 
aid  of  man,  who  has  learned  that,  by  working  cooperatively 
with  the  help  of  machinery,  industrial  miracles  may  be 
accomplished.  Steam  and  electric  power  are  slaves, 
willing  and  eager  to  do  the  work  of  man.  Inventions  are 
the  means  whereby  man  directs  and  utilizes  these  forces 
of  nature. 

The  effect  of  inventions  may  be  seen  chiefly  in  three 
directions.  In  the  first  place,  through  inventions, 
Xhdr  mechanical  power  has  been  utilized  to  direct 

effects.  industry.     Man's     physical     strength     is     in- 

finitesimal. Mechanical  power  was  therefore  applied  to 
the  wheels  of  industry.  A  series  of  famous  inventions, 
beginning  with  the  work  of  Hargreaves,  Arkwright,  and 
Watt,  first  taught  man  how  to  apply  the  forces  of  nature 
to  the  field  of  industry.  Water  power,  steam,  and  elec- 
tricity, each  in  succession  has  been  substituted  for  human 
energy.  To-day  we  even  witness  the  harnessing  of  Ni- 
agara Falls,  and  the  almost  miraculous  utilization  of  the 
vibratory  forces  of  nature. 

Inventions  have,  in  the  second  place,  revolutionized 
means  of  communication.  As  soon  as  men  discovered 
that  the  wheels  of  industry  could  be  driven  more  cheaply 
and  efficiently  by  mechanical  power  than  by  human 
energy,  they  applied  this  knowledge  to  improving  their 
transportation  facilities.  The  increased  supply  of  economic 
goods  could  thus  be  transported  cheaply  between  distant 
places.  The  development  of  the  railway,  the  telephone,  the 
telegraph,  the  trolley  car,  and  the  commercial  automobile 


Early  American  Industry  239 

have  all  contributed  vastly  to  industrial  development. 
In  the  future  the  possibilities  of  the  airship  are  yet  to  be 
realized. 

Inventions  have  finally  exercised  a  wonderful  influence 
on  labor.  The  Yankee  is  noted  for  doing  nothing  by  hand 
that  may  be  done  more  quickly  or  cheaply  by  machinery. 
As  a  result,  more  labor-saving  devices  have  been  invented 
in  the  United  States  than  in  any  other  country.  Examples 
of  such  machinery  are  found  everywhere.  In  lifting  and 
carrying  heavy  masses  of  iron  and  lumber,  great  cranes  now 
do  the  work  once  done  by  human  muscles.  The  old  hand 
press  of  Benjamin  Franklin's  time  has  been  replaced  by  the 
huge  printing  machines  of  the  present  day.  By  the  in- 
vention of  labor-saving  machinery,  the  Yankee  has  caused 
his  head  to  save  his  hands. 

The  logical  outcome  of  these  new  conditions  brought 
about   by   inventions   was   the   advent   of   the    "  factory 
system"    of    industry.     It    has    already    been  The  "fac- 
pointed  out  that  during  colonial  times  American  J*j  ,^s_ 
industrial  methods  and  processes   were   simple  Its  essentiai 
and  easily  performed.     The  home  was  the  seat  of  feat"res- 
industry.     Here  was  done  the  work  of  spinning,  weav- 
ing, and  cloth  making.     But,  with  the  advent  of  the  new 
inventions  of  the  latter  half  of.  the  eighteenth  century, 
industry  required  entirely  new  conditions.     Complicated 
machinery  could  not  be  installed  in  the  home ;   it  must  be 
separately  housed  in  the  factory.     Things  were  thus  no 
longer  hand-made  and  home-made,  but  machine-made  and 
factory-made.     Labor,  too,  instead  of  consisting  of  a  small 
family  group  was  now  made  up  of  great  groups  in  large 
factories.     In  this  manner,   the  nineteenth  century  wit- 
nessed the  development  of  the  factory  system  of  industry. 


240  American  Economic  Life 

The  advantages  of  this  system  are  seen  primarily  in  the 
production  of  wealth.  The  great  quantities  of  goods 
its  ad-  produced  by  the  factory  make  possible  a  de- 

vantages.  crease  in  the  cost  of  manufacturing.  In  con- 
trast to  agriculture,  which  is  subject  eventually  to  the  law 
of  diminishing  returns,  manufacturing  is  subject  to  what 
is  known  as  the  law  of  constant  returns.  That  is,  the 
value  of  the  product  turned  out  increases,  more  or  less 
regularly,  with  the  cost  of  manufacturing.  If,  then,  the 
cost  of  production  can  be  reduced,  while  the  demand  for 
the  product  remains  the  same,  the  possibility  of  providing 
goods  more  cheaply  becomes  steadily  greater.  Inventions, 
by  eventually  reducing  the  cost  of  production,  especially  in 
the  field  of  labor,  normally  result  in  a  larger,  cheaper,  and 
better  output  of  goods. 

From  the  standpoint  of  consumption,  the  advantages  of 
the  factory  system  are  no  less  evident.  Things  which  were 
formerly  produced  in  the  home  with  great  care  and  ex- 
pense are  now  supplied  by  the  factory.  Hosiery  firms  in 
one  week  turn  out  ten  thousand  dozen  pairs  of  stockings, 
while  factories  deluge  the  housekeeper  with  manufactured 
breakfast  foods  and  canned  fruit.  Because  the  factory 
can  do  all  this  more  cheaply  than  the  home,  man's  con- 
sumption has  become  more  varied. 

The  factory  system  of  industry  has  some  disadvantages 
also.  These  were  felt  chiefly  in  the  period  of  transition, 
its  Msad-  when  large  numbers  of  skilled  laborers  were 
vantages.  forced  out  of  work  by  the  introduction  of 
machinery.  However,  after  an  adjustment  to  the  new 
conditions  had  been  effected,  this  evil  was  in  part  removed. 
A  more  present  evil  is  found  in  the  fact  that  individuals, 
living  and  working  under  the  factory  system,  are  subjected 


Early  American  Industry  241 

to  the  harmful  conditions  imposed  by  that  system.  In  this 
connection  attention  has  already  been  called  to  the  evils  of 
child  labor,  to  the  danger  from  unguarded  machinery, 
from  dust,  high  temperature,  and  lack  of  ventilation. 
Then,  too,  the  massing  of  laborers  in  large  cities  near 
factories  presents  a  serious  problem.  But  after  all,  these 
conditions  are  transitory  and  may  in  the  course  of  time 
be  remedied. 

QUESTIONS  FOR  RECITATION 

1.  Explain  the  kinds  of  industries  open  to  the  colonists. 

2.  Why  did  they  wish  to  develop  secondary  industries? 

3.  What  was  the  English  colonial  policy  and  how  was  it  carried 
out? 

4.  Was  this  policy  beneficial  to  England?    To  the  colonies? 
Why? 

5.  Were  the  colonists  justified  in  objecting  to  the  British  re- 
strictions on  their  manufacturing  and  commerce  ? 

6.  Had  the  American  manufacturers  no  alternative,  in   1789, 
but  to  ask  for  a  protective  tariff?    Does  this  necessity  exist  to-day? 

7.  Explain  the  effect  of  the  War  of  18 12  upon  American  in- 
dustries. 

8.  Explain  the  domestic  system  of  industry.     Can  you  cite  any 
instances  of  this  to-day  ? 

9.  Describe  the  origin  of  the  factory  system.    Explain  its  meaning. 
10.   Discuss   the   importance   and   the   effects   of   inventions   to 

society. 

n.   Describe  the  advantages  of  the  factory  system. 

12.  What  are  the  chief  evils  of  the  factory  system? 

13.  Can  the  evils  of  the  factory  system  be  separated  from  it  ?    If 
so,  how  ? 

PROBLEMS   FOR  DISCUSSION 

1.  Contrast  the  economic  with  the  political  causes  of  the  Revo- 
lutionary War. 

2.  What  important  influence  did  the  division  of  industries  — 


242  American  Economic  Life 

agriculture  in  the  Southern,  and  manufacturing  and  commerce  in  the 
Northern  colonies  —  have  upon  the  later  history  of  the  United 
States? 

3.  Can  any  parallel  be  drawn  between  the  English  colonial 
policy  of  1700  and  the  American  colonial  policy  of  1900? 

4.  Was  Hamilton  correct  in  assuming  that  a  nation  should  be 
self-supporting  through  the  production  of  all  the  necessaries  of 
life? 

5.  What  factors  made  possible  the  rapid  advance  of  American 
manufactures  after  181 5? 

6.  What  advantage  had  the  early  American  over  the  European 
manufacturer  ?     What  disadvantage  ? 

7.  Where  do  the  benefits  of  inventions  go  ?     Explain  fully. 

8.  What  is  the  most  effectual  way  of  encouraging  inventors? 

9.  Is  the  factory  system  essential  to  civilization  ?     Why  ? 

10.  Are  there  any  ways  in  which  the  factory  system  may  be  super- 
seded ? 

11.  Has  the  increased  amount  of  goods  produced  under  the  factory 
system  made  up  for  the  loss,  individually,  which  has  been  the  lot  of 
many? 

SUPPLEMENTARY  READING 

Bogart,  E.  L.    Economic  History  of  the  United  States,  Parts  II  and 

III. 
Cheyney,  E.  P.     Industrial  and  Social  History  of  England,  Chaps. 

VII  and  VIII. 
Coman,  K.    Industrial  History  of  the   United  States,   Chaps.   Ill, 

IV,  V,  VI. 
Toynbee,  A.     The  Industrial  Revolution. 
Wright,  C.  D.    Industrial  Evolution  of  the  United  States,  Parts  I, 

n,  iv.  , 


CHAPTER  XXVI 

Large  Scale  Production 

I.   Nature  of  large  scale  production 
i.   Its  meaning 

2.  The  old  method 

3.  The  present  method : 

a.  An  illustration 

b.  Its  essential  features 

c.  How  it  has  spread 

II.   Effects  of  large  scale  production 

1 .  The  advantages : 

a.  Decreased  cost  of  production 

b.  Control  of  the  product 

c.  Utilization  of  by-products : 

(1)  Meaning 

(2)  Examples 

d.  Specialization  in  industry 

2.  The  disadvantages : 

a.  Economic 

b.  Political 

3.  Other  effects : 

a.  On  labor 

b.  On  capital 

4.  The  conclusion 

Nature  of  Large  Scale  Production.  —  The  logical  out- 
come of  the  factory  system  is  the  system  of  large  scale 
production.     This    system   is    applied    to   that  Its 
modern  method  of  production  which  involves  meaning- 
(1)  the  use  of  colossal  sums  of  capital,  (2)  the  highest 

243 


244  American  Economic  Life 

efficiency  of  labor  secured  through  complete  organization 
and  perfect  equipment,  and  (3)  the  control  of  the  re- 
sources necessary  to  the  production  of  the  finished  article. 
When  the  factory  system  first  developed,  production  was 
accomplished  in  a  comparatively  simple  manner,  and  for 
that  reason  was  known  as  small  scale  production.  But 
with  the  marvelous  machinery  and  the  perfected  methods 
of  recent  years,  modern  production  has  entered  upon  a 
large  scale  stage. 

Consider,  for  example,  in  the  iron  industry,  the  difference 
between  the  methods  employed  in  the  last  century  and 
The  old  those  used  to-day.  When  iron  ore  was  dis- 
method.  covered  in  the  Lake  Superior  region,  after  the 
iron  industry  had  been  centered  at  Pittsburgh,  the  manu- 
facturers of  iron  wished  to  transport  the  ore  to  the  coal 
district.  To  accomplish  this,  steamboats  were  employed 
to  carry  the  ore  down  the  Lakes  to  a  point  near  Pittsburgh  ; 
and  then  the  ore  was  taken  from  the  boats  by  means 
of  hand  tools,  such  as  shovels  and  wheelbarrows.  This 
simple  method  of  performing  the  work  was  known  as 
small  scale  production. 

In  contrast  to  this  to-day  we  have  the  methods  of  large 

scale  production.     The  ore,  dug  from  the  ore  fields  with 

.   steam  shovels,  is  hauled  to   the  lakeside  and 

The  present  t  ' 

method:  emptied  on  a  high  wharf.  From  this  wharf 
Aniiius-  the  iron  ore  is  dropped  through  chutes  into  the 
hold  of  an  ore  ship,  which  then  proceeds  to  the 
lower  Lake  ports.  Here  special  electrical  machinery 
operates  huge  grab-buckets,  which  drop  into  the  hold  of 
the  ship,  grab  from  six  to  ten  tons  of  ore  at  once,  and 
transfer  it  to  the  cars  waiting  to  convey  it  to  Pittsburgh. 
By  means  of  these  grab-buckets,  ten  thousand  tons  of  ore 


Large  Scale  Production  245 

can  be  transferred  from  the  vessel  to  the  cars  in  a  few  hours. 
In  all  these  processes  it  will  be  observed  that  crude  ma- 
chinery and  muscular  energy  have  been  replaced  by  highly 
perfected  mechanical  appliances. 

But  these  appliances  are  not  secured  for  nothing.  The 
unloading  plant  itself  costs  a  quarter  million  dollars,  — 
a  sum  greater  than  that  represented  by  the  jts  essential 
entire  plant  of  the  small  scale  producer.  Large  features- 
scale  production,  therefore,  necessitates  not  only  the  most 
modern  machinery  and  the  most  scientific  methods  of 
production,  but  it  further  necessitates  the  vast  sums  of 
capital  required  for  these  purposes.  Again,  this  production 
cannot  be  carried  on  without  an  army  of  industrial  workers 
with  a  highly  perfected  organization.  Finally,  the  large 
scale  steel  producer  requires  control  of  the  basis  of  his 
industry,  —  the  raw  materials  of  coal  and  iron. 

The  development  of  large  scale  production  in  the  United 
States  from  the  last  quarter  of  the  nineteenth  century 
has  been  phenomenal.  By  no  manner  of  means  How  it 
has  this  method  been  confined  to  the  iron  and  has  sPread- 
steel  industries.  On  the  contrary,  it  has  spread  to  the 
production  of  oil,  of  sugar,  of  tobacco,  of  foodstuffs,  of 
electrical  appliances,  of  locomotives,  of  ships,  and  indeed  of 
practically  all  the  leading  industries  of  the  country. 

Effects  of  Large  Scale  Production.  —  This  system  of 
production  has  had  a  marked  effect  upon  the  industrial 
life  of  America.     Its   consequences  have  been    .  M 

^  .         Advantages : 

both  advantageous  and  disadvantageous,  with   Decreased 
the  balance   in  favor  of   the   benefits   derived  costofpro- 
from    this    system    of    production.     Foremost 
among  these  benefits  is  the  possibility  of  decreasing  the 
cost  of  production.     We  have  seen  that  the  natural  con- 


246  American  Economic  Life 

sequence  of  the  factory  system  was  to  decrease  the  cost 
of  production  by  reducing  the  amount,  and,  therefore,  the 
cost  of  the  skilled  labor  required  under  the  old  domestic 
system  of  industry.  Large  scale  production,  which  is 
based  upon  the  factory  system,  has  greatly  accentuated  this 
tendency  to  reduce  the  cost  of  production  by  securing 
greater  standardization  in  industry,  by  increasing  the 
number  of  labor-saving  devices,  and  by  enlarging  the 
economies  of  production.  It  must  be  remembered,  how- 
ever, that  decreased  cost  of  production  is  not  synonymous 
with  lower  prices.  This  distinction  will  be  further  em- 
phasized in  discussing  the  evils  of  this  system  of  pro- 
duction. 

Large  scale  production  decreases  cost  of  production, 
not  only  through  the  use  of  improved  machinery,  but 
c       ,  also  through  the  control  of  raw  materials,  the 

of  the  utilization  of  by-products,  and  the  specializa- 

tion of  industrial  processes.  In  the  first  place, 
this  system  of  industry  aims  to  place  in  the  same  hands 
the  control  of  the  product  from  the  time  it  is  raw  material 
until  it  has  been  converted  into  a  finished  or  semi-finished 
product.  This  fact  may  be  well  illustrated  by  the  develop- 
ment of  the  Carnegie  Steel  Company.  Andrew  Carnegie, 
who  originally  controlled  a  small  steel  mill,  wished  to  own 
also  the  raw  materials,  —  ore  and  coke,  —  as  well  as  the 
means  of  transporting  them  to  his  works.  He  there- 
fore proceeded  to  secure  control,  successively,  of  the  Frick 
Company's  coal  and  coke ;  of  extensive  ore  fields  in  the 
Lake  region;  and,  finally,  of  certain  transportation  lines 
running  into  Pittsburgh.  In  this  manner,  the  Carnegie 
Steel  Company  secured  control  of  steel  from  the  ore  bed 
to  the  finished  rail.     Since  the   result  of  this  integrating 


Large  Scale  Production  247 

process  is  to  develop  a  tendency  toward  monopolization 
of  natural  resources,  the  consequences  of  this  policy,  if 
pursued  in  an  anti-social  manner,  may  be  disastrous  to 
society.  However,  when  the  interests  of  the  community 
are  properly  safeguarded,  the  ultimate  effect  of  integra- 
tion in  industry  is  advantageous  to  society. 

Another  striking  advantage  of  large  scale  production  is 
found  in  its  utilization  of  by-products.     By-products  are 
the  waste  of  industry,  which   by  special   pro-    mlization 
cesses  are  converted  into  economic  goods.     In  o/by- 
the  packing  houses  of  the  West,  for  example, 
bones  are  made  into  many  useful  articles ;    fats  provide 
glycerine  for  the  preparation  of  soap  and  toilet  articles; 
and  the  gray  matter  of  calves'  brains  is  turned  into  medicine 
for  the  treatment  of  nervous  diseases.     Through  the  aid 
of  by-product   utilization,   the   great  Western   packer  is 
enabled  to  sell  his  main  product  at  a  price  lower  than  that 
charged  by  his  competitors,  and,  thereby,  secure  partial 
monopoly  of  his  business.     When  the  power  of  the  large 
scale  producer  is  used  in  this  manner,  it  takes  the  form  of 
"  unfair  competition." 

Other  industries  effect  similar  savings.  Slag,  or  waste 
from  iron  furnaces,  is  now  made  into  high-class  brick. 
"  Buckwheat  "  and  "  dust  "  coal  were  formerly  thrown 
away  as  refuse  after  the  larger  sizes  had  been  screened  out. 
To-day,  however,  this  coal  is  utilized  in  the  production 
of  steam.  Perhaps  the  best-known  utilization  of  by- 
products has  come  with  the  development  of  the  cottonseed 
oil  industry.  In  i860,  cottonseed  was  garbage ;  in  1870, 
fertilizer;  in  1880,  cattle  food;  and  in  1890,  table  food. 
Such  striking  transformations  make  us  wonder  what  the 
future  may  bring  forth. 


248  American  Economic  Life 

Still  another  great  advantage  resulting  from  large  scale 
production  is  found  in  specialization  in  industry.  Al- 
speciaiiza-  tnough  large  scale  production  has  brought  a 
tfon  in  large  number  of  plants  under  one  management, 

this  centralization  is  resulting  in  each  plant's 
specializing  in  the  manufacture  of  some  particular  product. 
For  example,  in  manufacturing  blacksmiths'  supplies,  one 
factory  makes  horseshoes ;  another,  horseshoe  nails ;  a 
third,  drills  ;  and  a  fourth,  bolts  and  nuts.  In  this  manner 
industry  is  being  constantly  specialized  ;  and,  of  course,  along 
with  this  industrial  specialization  and  minute  subdivision 
of  labor,  great  economies  of  production  have  been  effected. 

Large  scale  production  thus  involves  the  possibilities  of 
many  advantages  to  civilization.  However,  as  is  usual 
The  disad-  w^tn  great  contributions  to  industrial  develop- 
vantages:  ment,  this  system  of  production  is  at  times 
Economic.  accompanied  by  serious  disadvantages  to 
society.  These  evils  may  be  economic,  political,  or  social 
in  character.  On  the  economic  side,  the  benefits  resulting 
from  the  decreased  cost  of  production,  made  possible  by 
large  scale  production,  may  be  enjoyed,  not  by  the  com- 
munity in  the  form  of  lower  prices  and  higher  wages,  but 
by  the  great  producers  in  the  form  of  higher  profits  and  lower 
wages.  This  situation  is  brought  about  by  the  unchecked 
monopoly  power  of  the  large  scale  producer,  by  means  of 
which  he  may  be  permitted  deliberately  to  crush  his 
competitors. 

From  the  social  and  political  standpoint,  large  scale  pro- 
duction may  result  in  equally  potent  evils  to  social  welfare. 
An  enormous  amount  of  wealth,  concentrated  in 
the  hands  of  a  relatively  small  number  of  indi- 
viduals, gives  this  group  of  men  extraordinary  power  over 


Large  Scale  Production  249 

the  community.  This  power  may  be  used  for  the  benefit 
or  for  the  detriment  of  society.  For  example,  by  means 
of  this  power,  large  scale  producers  may  secure  "  special 
privilege  "  from  the  constituted  authorities,  and  thus  form 
what  has  been  called  a  "  corrupt  alliance  between  business 
and  politics."  To  overcome  these  evil  possibilities,  society 
must  be  constantly  on  guard  to  check  the  growth  of  corpo- 
rate monopoly  power. 

Some  other  consequences,  which  have  made  a  deep 
impress  upon  our  social  life,  result  from  the  system  of 
large  scale  production.  In  the  first  place,  men  other 
do  not  produce  finished  goods.  This  result  was,  effects: 
of  course,  first  brought  about  by  division  of  0nlabor- 
labor,  but  the  great  specialization  of  large  scale  produc- 
tion has  rendered  this  all  the  more  inevitable.  Formerly 
a  man  made  a  shoe,  or  a  hat,  or  a  coat.  To-day  he  per- 
forms but  one  operation  required  in  the  productive  process. 
For  example,  a  man  may  simply  polish  the  oil  cups  of 
locomotives,  which  are  eventually  used  to  haul  food  across 
the  continent  for  his  table.  He  no  longer  produces  food, 
but  directs  his  labor  toward  the  performance  of  one  ordi- 
nary operation.  This  change  has  resulted  in  labor's 
being  highly  specialized  and  organized  in  the  form  of  a 
great  industrial  army. 

On  the  other  hand,  the  effects  of  this  system  of  large 
scale  production  have  been  felt  perhaps  even  more  in  the 
organization  and  management  of  capital.  The 
old,  simple  methods  of  doing  business  are  rapidly 
disappearing.  Formerly  a  man  with  a  small  amount  of 
capital  engaged  in  business  independently ;  to-day  he  be- 
comes one  of  a  thousand  all  engaged  in  large  scale  pro- 
duction.    The  small,  single-handed  capitalist  has  been  re- 


250  American  Economic  Life 

placed  by  the  huge,  cooperative  corporation,  which  is  the 
form  of  business  organization  necessitated  by  large  scale 
production. 

Whether  the  benefits  of  large  scale  production  are  to 
accrue  to  society  collectively,  or  to  men  individually,  will 
The  depend  altogether  upon  the  relation  maintained 

conclusion,  between  the  large  scale  producer  and  the  com- 
munity politically  organized,  that  is,  the  government.  If 
society  permits  large  scale  production  to  be  carried  on  by 
powerful  groups  of  individuals  without  regard  to  the 
public  interest,  the  benefits  of  this  system  will  be  con- 
fined to  the  few  who  direct  its  operation.  If,  on  the  other 
hand,  the  government  maintains,  through  properly  con- 
stituted authorities,  a  wise  supervision  and  a  sound  regu- 
lation of  the  activities  of  the  great  giant  producers,  the 
welfare  of  society  will  be  promoted  and  the  interests  of 
the  producers  safeguarded.  Like  the  factory  system,  the 
advantages  of  large  scale  production  are  permanent  and 
increasing,  while  the  disadvantages  are  transitory  and 
remediable. 

QUESTIONS  FOR  RECITATION 

1.  Describe  the  evolution  of  large  scale  production. 

2.  What  is  the  relation  between  the  factory  system  and  large 
scale  production  ? 

3.  Give  the  chief  characteristics  of  large  scale  production. 

4.  Contrast  the  methods  of  small  scale  production  with  those  of 
large  scale  production. 

5.  Give  ten  illustrations  of  large  scale  production  in  American 
industry. 

6.  Enumerate  in  outline  form  the  effects  of  large  scale  pro- 
duction. 

7.  Explain  how  this  system  of  production  decreases  the  cost  of 
production.     Does  it  necessarily  lower  prices  ?    Why  not  ? 


Large  Scale  Production  251 

8.  Show  the  effects  of  this  system  upon  the  control  of  natural 
resources.     Give  examples. 

9.  What  is  the  relation  between  large  scale  production  and  the 
use  of  by-products  ?    Give  examples. 

10.  Does   the   saving   through   by-products   always  benefit   the 
consumer  ?    Why  not  ? 

11.  Show  the  relation  between   large  scale  production   and  spe- 
cialization in  industry.     Explain  the  effect  of  this  upon  labor. 

12.  What  effect  has  large  scale  production  had  upon  capital? 

13.  Explain  the  economic  evils  resulting  from  large  scale  pro- 
duction. 

14.  Describe  the  political  effects  of  large  scale  production. 

15.  Show  clearly  how  t,he  economic  evils  of  large  scale  produc- 
tion may  be  overcome. 

16.  How  may  the  political  evils  be  remedied? 

PROBLEMS   FOR  DISCUSSION 

1.  What  effects  have  inventions  had  on  large  scale  production? 

2.  Are  the  advantages  of  large  scale  production  an  integral 
part  of,  or  are  they  merely  incidental  to,  this  system  of  production? 

3.  Could  modern  society  exist  without  large  scale  production? 
Explain. 

4.  Discuss  the  economic  effects  on  China  of  introducing  a  sys- 
tem of  large  scale  production. 

5.  Discuss  the  importance  of  by-products  to  modern  industry. 

6.  What  has  been  the  chief  cause  of  the  utilization  of  by-products  ? 

7.  Are  the  advantages  derived  by  the  public  from  large  scale 
production  more  important  than  the  disadvantages  ?    Why  ? 

8.  Is  it  likely  that  large  factories  will  ever  be  devoted  to  portrait 
painting  ?     Give  reasons. 

9.  For  which  of  the  following  articles  is  large  scale  production 
appropriate :  hand-made  shoes ;  machine-made  shoes ;  furniture ; 
nails ;  cut  glass ;  orchids ;  millinery  ?    Tell  why  in  each  case. 

10.  Do  you  understand  that  all  business  is  destined  to  become 
large  scale  business  ?     Give  original  illustrations. 

11.  Show  how  large  scale  production  may  result  in  the  monopoliza- 
tion of  natural  resources.     Give  examples. 


252  American  Economic  Life 

12.   Show  the  limitations  of  government  regulation  of  large  scale 
production. 

SUPPLEMENTARY  READING 

Clay,  H.    Economics,  Chaps.  VII-VIII. 

Ely,  R.  T.    Evolution  of  Industrial  Society,  Chap.  V. 

Ely,  R.  T.    Monopolies  and  Trusts,  Chap.  V. 

Jenks,  J.  W.     The  Trust  Problem,  Chap.  II. 

Moore,  J.  R.  H.    Industrial  History  of  the  American  People,  Chap. 

XII. 
Smith,  J.  R.     The  Story  of  Iron  and  Steel. 
Wright,   C.  D.     Industrial  Evolution  of  the   United  States,   Chaps. 

XIII  and  XIV. 


CHAPTER  XXVII 

Business  Organization 

I.   The  usual  forms  of  organization 
i.   The  enterpriser 

2.  The  partnership : 

a.  Its  advantages 

b.  Its  disadvantages 

3.  The  corporation : 

a.  Its  nature 

b.  Its  advantages : 

(1)  Great  capital 

(2)  Limited  liability 

(3)  Good  management 

II.   The  trust  form  of  organization 

1.  Its  nature 

2 .  Its  different  forms : 

a.  The  "pool" 

b.  The  board  of  trustees 

c.  The  holding  company 

3.  Its  regulation : 

a.  Why  necessary 

b.  How  attempted : 

(1)  Sherman  Anti- trust  Act 

(2)  Clayton  Anti-trust  Act 

(3)  Federal  Trade  Commission 

c.  Influence  of  Supreme  Court 

d.  The  outlook 

The  Industrial  Revolution,  from  the  domestic  system 
to  the  culmination  of  the  factory  system  in  large  scale 

253 


254  American  Economic  Life 

production,  is  reflected  in  the  world  of  business  organization 
in  a  series  of  changes  in  industrial  management.  In  fact, 
so  important  has  this  element  of  management  become  in 
modern  industry,  that  it  is  now  regarded  as  a  new  unit 
or  factor  of  production.  However,  when  this  element  of 
management  is  so  regarded,  it  must  be  looked  upon  as  a 
composite  factor  of  production,  that  is,  as  a  union  of  two 
or  three  of  the  original  requisites  of  production  —  land, 
labor,  and  capital  —  upon  which  all  wealth-producing 
operations  depend. 

Usual  Forms  of  Organization.  —  It  was  customary  for 
many  years  past  for  business  to  be  conducted  and  organized 
The  enter-  on  a  purely  individual  basis.  A  single  employer 
pnser.  \,qq^  charge  of  the  enterprise,  furnished  the  land, 

labor,  and  capital  required  for  the  undertaking,  assumed 
the  risks  involved  in  the  transaction,  and  suffered  the  loss  or 
reaped  the  profit  according  to  the  outcome  of  the  project. 
In  fact,  this  method  is  still  pursued  to-day  by  the  inde- 
pendent business  man  who  ventures  out  upon  an  industrial 
undertaking.  Because  he  undertakes  the  full  responsi- 
bilities of  the  business,  he  is  called  an  enterpriser.  Curi- 
ously enough  he  is  found  in  both  extremes  of  business. 
He  may  be  a  humble  peanut  vendor,  a  struggling  boot- 
black, or  an  organizing  manager  of  a  great  capitalistic 
business  that  reaches  out  into  every  state  of  the  union. 
In  the  former  case,  however,  he  furnishes  his  own  capital 
and  labor ;  while  in  the  latter  case  he  relies,  at  least  in  part, 
upon  the  capital  and  labor,  as  well  as  the  natural  resources, 
of  others  who  have  intrusted  the  management  of  these 
business  elements  to  his  care  and  guidance.  In  order  to 
give  this  enterpriser  a  distinctive  name,  the  term  "entre- 
preneur "  has  been  applied  to  him. 


Business  Organization  255 

When  the  factory  system  became  firmly  established  it 
was  soon  demonstrated  that  the  best  results  from  business 
undertakings  were  not  obtainable  from  the  old-  _, 

0  .  The  partner- 

fashioned  organization  of  business  under  a  single   ship : 

employer.     Hence  arose  the  partnership  form  of  Its  advan- 

,        .  ......  .     ,.      tages. 

business  organization  in  which  two  or  more  indi- 
viduals enter  business  together.  The  single  employer  is  re- 
placed by  two,  three,  or  more  men  who  jointly  and  severally 
conduct  the  business,  sharing  its  gains  and  losses.  This 
method  of  doing  business  has  a  double  advantage.  Not 
only  is  the  capital  increased,  but  the  work  also  is  more  ef- 
ficiently performed  by  reason  of  the  fact  that  each  partner 
is  able  to  specialize  in  some  particular  direction. 

On  the  other  hand,  the  partnership  has  two  serious  dis- 
advantages. The  first  of  these  lies  in  the  fact  that  each 
partner  is  responsible,  up  to  the  value  of  his  per-  Its  disad. 
sonal  possessions,  for  all  debts  contracted  by  the  vanta&es- 
other  partners  in  pursuance  of  the  business.  A  further 
disadvantage  of  the  partnership  is  the  limited  amount  of 
capital  it  controls.  Although  the  amount  is  usually  greater 
than  that  which  a  single  business  man  commands,  yet  it 
falls  so  far  short  of  the  needs  of  modern  times  that  other 
forms  of  business  organization  were  devised. 

Therefore,  to  meet  the  necessities  of  large  scale  pro- 
duction, the  industrial  corporation  came  into  existence. 
A  corporation  may  be  defined  as  "  an  association  The  cor_ 
of  individuals,  known  as  stockholders,  who  are  potation: 
empowered  by  legal  charter  to  elect  annually  a    tsnature- 
board  of  directors,  and  through  it  to  act  as  one  person  in 
the  conduct  of  the  specified  business."     The  corporation 
is  thus  a  legal  entity,  existing  only  in  the  eyes  of  the  law. 
Although  it  is  an  artificial  creature,  it  possesses  many 


256  American  Economic  Life 

attributes  of  natural  persons.  For  example,  it  has  power 
to  sue  and  to  be  sued ;  to  hold,  purchase,  and  convey  real 
and  personal  estates ;  to  appoint  officers  and  agents  ;  and, 
above  all,  it  is  empowered  "  to  have  succession,  by  its 
corporate  name,  for  the  period  limited  in  its  charter,  and 
when  no  period  is  limited,  perpetually."  This  last  feature 
of  continued  existence  is  extremely  valuable  to  the  corpora- 
tion because  dependence  upon  the  life  of  an  individual  en- 
terpriser, or  partner,  creates  a  most  undesirable  instability. 

Aside  from  its  permanent  character,  the  corporation, 
as  a  form  of  business  organization,  possesses  other  advan- 
its  ad-  tages.     Chief  among  these  is  its  ability  to  amass  a 

vantages.  great  sum  of  capital.  Thousands  of  individuals, 
through  their  purchase  of  stock  in  the  corporation,  con- 
tribute millions  to  its  capital.  This  feature  has  already 
been  referred  to  in  connection  with  the  effect  of  large  scale 
production  upon  capital. 

The  ability  of  the  corporation  to  raise  capital  depends 
largely  upon  the  principle  of  limited  liability.  According 
to  this  principle,  stockholders  are  liable  for  the  debts  of 
the  company  only  to  an  amount  equal  to  the  par  value 
of  their  stock.  If  the  business  fails,  therefore,  a  single 
stockholder  can  lose  only  the  value  of  his  stock.  The 
exception  to  this  general  rule  is  in  the  case  of  national 
banks,  where  the  liability  is  double  the  amount  of  the  par 
value  of  the  stock  subscribed. 

The  corporation  also  possesses  advantages  from  the 
standpoint  of  the  management  of  its  business.  This  form 
of  business  organization  secures  flexibility.  Through  the 
simple  process  of  a  stockholders'  election  a  complete  change 
in  the  management  may  be  effected.  Likewise,  through  the 
offer  of  high  salaries,  the  corporation  is  able  to  secure  the 


Business  Organization  257 

services  of  efficient  men  far  beyond  the  reach  of  smaller 
concerns.  Finally,  the  economies  of  large  scale  production, 
made  possible  by  the  resources  of  the  corporation,  con- 
stitute perhaps  the  greatest  advantage  of  this  form  of 
business  organization. 

Trust  Form  of  Organization.  —  Just  as  the  partnership 
was  superseded  by  the  corporation,  so  the  single  corpora- 
tion has  been  superseded  in  many  fields  of  ac- 

.    .  -  1       Its  nature. 

tivity  by  a  still  larger  unit  of  management,  the 
trust.  The  trust,  like  the  corporation,  is  a  form  of  business 
organization  devised  to  meet  a  definite  economic  need. 
Since  it  has  taken  on  different  forms,  the  trust  is  not 
capable  of  exact  definition.  However,  it  may  be  said 
to  be  a  combination  of  corporations,  and  to  have  passed 
through  three  stages  of  development. 

The  first  form  the  trust  assumed  is  popularly  known  as 
the  "  pool."  In  this  form,  independent  producers  in  any 
one  line  of  business  make  agreements  to  eliminate  its  forms : 
competition  among  themselves,  either  by  restrict-  The  "  pool." 
ing  output  or  by  fixing  prices.  This  form  of  combination 
originated  with  railway  companies.  The  pool  is  so  named 
because,  under  such  an  arrangement,  the  receipts  of  the 
various  companies  are  put  into  a  common  fund  or  "  pool  " 
and  divided  among  them  in  a  proportion  already  agreed 
upon.  Not  only  has  this  system  proved  weak  by  reason 
of  the  outbreak  of  mutual  jealousy  and  distrust,  but  such 
agreements  have  also  been  declared  illegal. 

Therefore,  the  trust  entered  on  its  second  stage  of  de- 
velopment.    In  this  stage  the  various  competing  corpora- 
tions turn  over  their  stock  to  a  central  board  of   The  board 
trustees,  which  hands  back  "  trust  certificates  "  °f  ***«*• 
in  exchange.     This  board,  holding  a  majority  of  the  stock 


258  American  Economic  Life 

of  the  various  constituent  companies,  maintains  complete 
harmony  among  the  companies  and  regulates  output  and 
price.  This  is  the  "  trust  "  in  the  technical  sense.  It  has 
been  declared  illegal. 

The  third  form  of  the  trust,  devised  because  the 
"  trustee  "  trust  was  outlawed,  is  known  as  the  holding 
The  holding  company.  Under  the  holding  company  plan, 
company.  eSLCh  corporation  entering  the  combination 
maintains  its  separate  existence.  To  secure  unity  of  action 
a  central  corporation  is  formed,  empowered  to  hold  stock 
of  other  corporations.  The  stock  of  the  parent  company 
is  then  exchanged  for  the  stock  of  the  various  constituent 
corporations.  This  places  under  one  central  control  the 
voting  power  of  the  stock  of  all  combining  companies,  thus 
insuring  uniformity  of  action  and  the  maintenance  of 
prices.  This  third  stage  resembles,  in  effect,  very  much 
the  second,  except  that  a  board  of  trustees  is  illegal,  and 
a  corporation  empowered  to  hold  stock  of  other  com- 
panies may  or  may  not  be  illegal. 

The  holding  company,  then,  is  the  present  form  of  busi- 
ness organization  adapted  to  the  needs  of  large  scale  pro- 
duction.    But  we  have  seen  that  this  system 

Its  regula- 
tion: of  production  sometimes  enables  the  few  men 

Why  who  organize  it  to  exercise  enormous  power  over 

the  community  through  their  control  over  natural 

resources  and  their  possession  of  vast  sums  of  capital.     By 

means  of  their  monopoly  power,  the  trusts  are  sometimes 

enabled  to  appropriate  to  themselves  the  benefits  of  large 

scale  production  by  raising  prices,  limiting  output,  and  by 

otherwise  controlling  production.     Hence,  to  attain  social 

welfare,  it  is  necessary  to  exercise  some  form  of  public 

control  over  the  trust  organization  of  industry.     At  first, 


Business  Organization  259 

the  states  attempted  to  exercise  this  regulation.  In  1889 
Kansas  took  the  lead  by  passing  a  law  against  business 
corporations,  and  was  soon  followed  by  other  states  in  the 
movement  to  curb  the  power  of  the  trusts.  These  laws 
usually  struck  at  all  combinations,  regardless  of  whether 
they  formed  complete  or  only  partial  monopolies.  They 
were  so  drastic  in  character  that  they  were  often  declared 
unconstitutional.  Furthermore,  the  laws  of  the  different 
states  conflicted  in  their  provisions.  But  above  all,  state 
action  proved  inadequate  because  of  the  limited  power  of 
the  states.  In  our  dual  system  of  government,  the  federal 
government  alone  has  power  over  interstate  commerce; 
and  it  is  chiefly  in  this  kind  of  commerce  that  the  great 
corporations  are  engaged.  Not  state,  but  federal  regula- 
tion, therefore,  became  imperative. 

In  1890  the  demand  for  federal  action  became  so  general 
and  insistent  that  Congress  passed  the  Sherman  Anti- 
trust Act.  According  to  this  act  "  every  con-  row  at_ 
tract,  combination  in  the  form  of  trust  or  other-  temPted- 
wise,  or  conspiracy,  in  restraint  of  trade  or  commerce 
among  the  several  states,  or  with  foreign  nations  "  is  de- 
clared illegal.  Furthermore,  this  act  makes  it  a  misde- 
meanor for  any  person  "  to  monopolize,  or  attempt  to 
monopolize,  any  part  of  the  trade  or  commerce  among  the 
several  states,  or  with  foreign  nations."  To  make  effective 
this  measure,  the  federal  courts  are  given  jurisdiction  in 
these  matters.  This  act  is  so  sweeping  in  its  terms  that 
it  has  been  held  to  apply  not  only  to  industrial  combina- 
tions, but  also  to  railway  combinations  and  labor  unions. 
In  fact,  the  language  of  this  act  is  so  inclusive  as  to  render 
difficult  its  exact  interpretation. 

In   1 9 14,  however,   the  passage  of  the  Clayton  Anti- 


260  American  Economic  Life 

trust  Act  modified  and  made  clearer  the  terms  of  the 
original  Sherman  Act.  This  later  act  exempts  labor  unions 
from  the  provisions  of  the  Sherman  Anti-trust  Act,  pro- 
hibits one  corporation  from  acquiring  stock  in  another 
corporation  with  the  purpose  of  substantially  lessening 
competition  between  them,  and  makes  illegal,  under  certain 
conditions,  the  system  of  interlocking  directorates. 

In  the  same  year,  1914,  Congress  established  the  Federal 
Trade  Commission,  composed  of  five  members  appointed 
by  the  President.  This  commission  is  not  only  endowed  with 
large  powers  of  investigation,  but  it  also  has  the  power 
to  require  special  reports  from  interstate  corporations 
whenever  it  believes  such  action  is  necessary  to  the  public 
welfare.  It  may,  upon  the  request  of  the  Attorney  General, 
investigate  the  activities  of  corporations  that  are  suspected 
of  violating  the  anti-trust  laws,  and  make  proper  recom- 
mendations for  the  reorganization  of  their  business.  It 
facilitates  the  operation  of  the  Sherman  and  the  Clayton 
Anti-trust  Acts  by  providing  new  and  more  effective 
methods  of  procedure.  In  this  manner  it  is  hoped  that 
any  tendency  to  monopoly  will  be  checked  in  its  early 
stages. 

In  the  last  analysis  the  legality  or  illegality  of  the  so- 
called  trust,  that  is,  the  holding  company,  depends  upon  the 
,    decision  of  the  United  States  Supreme  Court. 

Influence  of  t  M 

Supreme  In  19 10,  this  court  handed  down  two  vital  de- 
Court'  cisions  ordering  the  dissolution  of  the  Standard 

Oil  Company  and  the  American  Tobacco  Company.  In 
these  cases  it  was  conclusively  proved  that  these  corpora- 
tions were  guilty  of  practices  designed  to  secure  a  monopoly 
of  trade  and  commerce  in  their  respective  industries. 
Through  unfair  competition  and  unreasonable  restraint  of 


Business  Organization  261 

trade,  these  combinations  had  developed,  in  their  particular 
fields,  a  monopoly  with  power  to  fix  prices,  limit  output,  and 
determine  quality.  The  legality  of  the  industrial  combina- 
tion, therefore,  is  to  be  tested  on  the  basis  of  monopoly. 
If  the  effect  of  the  combination  is  to  create  such  a  monopoly, 
it  is  illegal;  if  the  effect  is  otherwise,  the  combination  is 
legal.  This  point  of  view  was  carried  out  to  its  logical 
conclusion  in  the  decision  of  the  Supreme  Court  in  1920, 
dealing  with  the  United  States  Steel  Corporation.  Here 
the  court  held  that  the  so-called  "  Steel  Trust  "  is  not 
a  combination  in  restraint  of  trade,  because,  in  spite  of  its 
size,  it  does  not  form  a  monopoly  of  the  steel  business,  and 
it  is  therefore  declared  to  be  legal. 

Thus  it  is  possible  for  certain  combinations  to  be  de- 
clared illegal,  and  for  others  to  exist  within  the  law.  When 
one  form  of  business  organization  is -declared  The 
illegal,  another  in  harmony  with  the  law  will  be  outlook- 
devised,  because  large  scale  production  appears  to  be  a 
necessary  part  of  modern  industrial  civilization.  The 
process  of  evolution  is  at  work  in  industry  as  well  as  in 
society ;  and  large  scale  production  is  one  of  its  products. 
This  does  not  mean,  however,  that  a  trust  organization 
of  industry  need  develop  at  the  expense  of  social  welfare. 
It  merely  means  that,  through  proper  legislation,  the 
economies  of  large  scale  production  and  the  benefits  of 
monopoly,  whenever  they  exist,  should  be  appropriated 
by  the  community  as  a  whole  rather  than  by  any  one  group 
of  individuals.  If  it  is  true  that  large  scale  production 
is  a  stage  of  industrial  evolution,  it  is  useless  to  attempt 
to  stifle  it,  and  it  is  inimicable  to  social  welfare  to  allow 
it  to  develop  free  of  all  social  restraints.  Both  the  interests 
of  the  producers  and  the  interests  of  the  consumers  must 


262  American  Economic  Life 

be  properly  safeguarded  by  effective  legislation.  Per- 
haps the  best  method  of  accomplishing  this  end  may  be 
attained  through  industrial  commissions  which  represent 
the  interests  both  of  the  individual  and  of  society. 

QUESTIONS   FOR  RECITATION 

1.  Explain  the  importance  of  the  element  of  management,  or 
business  organization,  in  modern  enterprises. 

2.  Is  managing  ability  an  original  or  composite  factor  of  pro- 
duction ?     Why  ? 

3.  Describe  the  simplest  method  of  conducting  business.  What 
name  is  applied  to  this  method  ?     Why  ? 

4.  Are  the  following  entrepreneurs :  a  cobbler,  a  farmer,  a  con- 
sulting engineer,  a  banker,  a  railroad  builder,  the  boss  of  a  section 
gang?     Tell  why  in  each  case. 

5.  What  is  a  partnership?  What  are  its  advantages  and  dis- 
advantages ? 

6.  Define  a  corporation.     Why  has  it  been  called  an  "artificial 


person 


»? 


7.  Explain  why  the  corporation  is  an  advantageous  form    of 
business  organization. 

8.  What  is  a  trust?    Why  must  the  definition  be  general  in 
nature  ? 

9.  Explain  the  difference  between  the  "pool"  and  the  "board 
of  trustees." 

10.  Explain  how  the  holding  company  differs  from  either  of  the 
above  forms  of  business  organization. 

11.  What  is  the  purpose  of  forming  a  holding  company? 

12.  Explain  clearly  why  it  is  necessary  to  control  or  regulate  the 
trusts. 

13.  Name  the  acts  by  which  this  regulation  is  attempted.     Give 
the  chief  provisions  of  each. 

14.  Explain  the  work  of  the  Supreme  Court  of  the  United  States 
in  this  direction. 

15.  What  is  the  present  form  of  the  trust?    When  is  it  legal? 
When  is  it  illegal  ? 


Business  Organization  •  263 

16.  What  happens  when  the  court  orders  the  trust  to  dissolve? 

17.  Do  you  believe  that  the  trust  organization  of  industry  can  be 
abolished  ?    Explain  your  answer. 

18.  If  not,  what  effective  remedy  do  you  suggest  for  the  control 
of  the  trusts  ? 

PROBLEMS  FOR  DISCUSSION 

1.  Name  the  different  forms  of  business  undertaking.  Discuss 
them  from  the  standpoint  of  their  relative  strength  and  weakness. 

2.  What  are  the  chief  points  of  difference  between  a  corporation 
and  a  partnership  ? 

3.  What  advantages  has  a  corporation  as  compared  with  a  part- 
nership? Are  there  any  respects  in  which  a  partnership  has  advan- 
tages not  possessed  by  a  corporation  ? 

4.  What  is  a  holding  company?  What  are  the  advantages 
afforded  by  this  form  of  organization  ? 

5.  Is  the  growth  of  combination  in  accord  with  economic  law? 
Why? 

6.  Is  the  movement  toward  combination  still  going  on?  Is  it 
likely  to  continue  in  the  future  ? 

7.  Are  all  trusts  monopolies?    Are  all  monopolies  trusts? 

8.  What  social  advantages  and  disadvantages  do  you  see  in  the 
trusts  ? 

0.  Is  there  likely  to  be  a  world  corporation  formed,  or  a  "great 
trust"  in  which  every  one  will  be  a  shareholder? 

10.   What  are  the  arguments  for  and  against  full  publicity? 

n.  On  what  basis  should  the  amount  of  capitalization  of  a  trust 
be  determined? 

12.  What  are  the  checks  on  the  power  of  monopolies  to  raise  the 
prices  of  their  products  ? 

13.  What  advantages  and  disadvantages  do  you  see  in  monopoly? 

14.  Would  the  abolition  of  the  tariff  result  in  the  disappearance  of 
the  trusts  ? 

15.  Name  some  of  the  tendencies  in  the  organization  of  natural 
resources. 

16.  Name  some  indications  of  increasing  governmental  activity 
in  business. 

17.  State  the  conflicting  views  regarding  the  trust. 


264  American  Economic  Life 

SUPPLEMENTARY  READING 

Carver,  T.  N.     Principles  of  Political  Economy,  Chap.  XIV. 

Clark,  J.  B.     The  Control  of  Trusts. 

Ely,  R.  T.     Outlines  of  Economics,  Chap.  XIII. 

Jenks,  J.  W.     The  Trust  Problem,  Chap.  VII. 

Montague,  G.  H.     Rise  and  Progress  of  the  Standard  Oil  Company. 

Moore,  J.  R.  H.     Industrial  History  of  the  American  People,  pp. 

428-438. 
Van  Hise,  C.  R.     Concentration  and  Control. 


CHAPTER  XXVIII 
The  Industrial  Army 

I.   Labor  cooperation 

i.   The  stages  of  cooperation : 

a.  Simple  cooperation 

b.  Division  of  employments 

c.  Division  of  labor 

d.  Specialization  in  industry 
2.   Advantages  of  cooperation  : 

a.  Concerning  the  product 

b.  Concerning  machinery 

II.   The  army  of  workers 
i .   The  organizer : 

a.  Policies  and  subordinates 

b.  Markets  and  methods 

2.  The  manager 

3.  The  foreman 

4.  The  wage  worker : 

a.  The  skilled  worker 

b.  The  semi-skilled  worker 

c.  The  unskilled  worker 

5.  The  conclusion 

The  change  in  business  organization  brought  about  by 
large  scale  production  has  been  accompanied  by  a  similar 
development  in  the  organization  of  labor.  Formerly, 
industrial  effort  was  largely  individual  and  competitive; 
to-day  it  is  almost  altogether  social  and  cooperative. 

Labor  Cooperation.  —  In  the  days  of  savagery,  com- 
paratively   little    industrial    work    was    performed.     The 

265 


266  American  Economic  Life 

men  fought,  hunted,  and  fished,  while  the  women  took 
charge  of  the  primitive  industries.  Gradually,  however, 
its  stages:  military  cooperation  led  to  industrial  coopera- 
Simpie  co-  tion.  Men  who  had  worked  together  to  kill  a  bear 
operation.  reSorted  to  the  same  method  in  throwing  logs 
across  a  stream.  Although  no  task  was  assigned  to  definite 
individuals,  each  man  helped  the  other  by  taking  part  in 
the  operation.  This  stage  in  the  development  of  labor  is 
described  as  simple  cooperation. 

But  simple  cooperation  at  best  is  unsatisfactory.  Some 
men  like  to  do  one  thing  better  than  another ;  hence  the 
Division  of  development  of  the  second  stage  of  labor  coopera- 
empioy-  tion  known  as  the  division  of  employments.  In 
this  stage,  one  group  kills  game,  another  builds 
boats,  while  the  women  carry  on  agriculture  or  weave 
cloth.  Each  produces  a  finished  product,  which  is  ex- 
changed for  the  product  of  some  other  group,  and  thus  a 
certain  degree  of  interdependence  runs  through  early 
society. 

The  next  step  in  labor  cooperation  is  division  of  labor. 
Formerly,  in  building  a  house  one  man  would  perform  all 
Division  of  the  parts  of  that  operation.  He  would  go  into 
labor.  tne  W00CiSj  fen  the  trees,  and  build  the  house. 

But  gradually  the  different  kinds  of  labor  involved  in  the 
task  of  house  building  were  divided  among  several  individ- 
uals. One  man  would  simply  fell  the  trees ;  another  cut 
them  into  logs;  another  haul  the  lumber;  and  another 
build  the  house  itself.  In  this  case  several  men  cooperate, 
but  each  performs  a  different  part  of  the  labor. 

Finally,  this  simple  division  of  labor  becomes  complex 
through  what  is  known  as  specialization  in  industry,  —  the 
fourth  and  present  stage  of  labor  cooperation.     By  means 


The  Industrial  Army  267 

of  this  principle  of  specialization,  each  part  of  the  labor 
already  divided  has  again  been  further  subdivided  in  the 
various  processes  necessary  for  the  finally  per-  SPeciaiiza_ 
fected  operation.     For  example,   in   the  above  Hon  in 
illustration,  the  man  who  chopped  down  the  tree 
—  one  part  of  the  labor  —  was  provided  with  an  ax  which 
was  the  result  of  the  labor  of  scores  of  workmen,  each  one 
of  whom  performed  some  particular  part  in  the  process. 
In  this  manner,  modern  methods  of  production  have  re- 
sulted in  minute  subdivision  of  labor  and  great  specializa- 
tion in  industry.     Cooperation  has  made  this  possible. 

By  means  of  this  form  of  labor  cooperation,  the  product 
is  not  only  increased  in  quantity,  but  improved  in  quality. 
Persons  who  cooperate  in  labor  learn  intimately  Advantages: 
the  special  tasks  they  perform.  Each  one  is  able  Concerning 
to  do  his  work  much  more  effectively,  therefore,  the  ProducL 
than  he  would  be  able  to  perform  work  involving  a  large 
number  of  separate  operations.  For  this  reason,  a  hundred 
socially  organized  workers  in  a  shoe  factory  are  able  to 
turn  out  more  shoes  arid  better  shoes  than  a  hundred 
individual  shoemakers. 

Another  great  advantage  of  this  kind  of  cooperation  is 
found  in  the  fact  that  it  makes  possible  the  increased  use 
of  machinery.  When  an  involved  operation,  concerning 
like  shoemaking,  has  been  minutely  subdivided  machin^y. 
into  forty  or  fifty  operations,  the  rougher  work  may  be 
done  more  quickly  and  more  cheaply  by  machinery  than 
by  human  hands.  Thus,  the  sewing  machine,  stitching 
through  heavy  leather,  accomplishes  a  speedier  and  better 
result  than  the  individual  hand  worker.  In  this  manner, 
man's  inventive  genius  develops  labor-saving  machinery 
to  take  the  place  of  human  energy.     It  is  this  high  special- 


268  American  Economic  Life 

ization  in  industry  which  furnishes  the  opportunity  for 
man  to  invent  and  develop  the  machinery  required  for 
the  special  processes. 

The  Army  of  Workers.  —  To-day,  as  a  result  of  this 
high  specialization  in  industry,  all  modern  industrial  labor 
The  is  cooperative.     The  American  labor  force  is  thus 

organizer:  highly  organized  from  top  to  bottom  in  the  sem- 
subordi-  blance  of  an  industrial  army.  At  the  head  of  this 
nates.  army  of  workers  is  the  organizer,  —  the  com- 

mander in  chief  of  his  particular  industry.  Like  the 
military  commander,  his  duties  are  to  determine  broad 
policies  and  to  intrust  their  administration  to  competent 
hands.  The  great  organizer  mobilizes  the  forces  of  labor 
and  capital  and  applies  them  to  natural  resources  in  such  a 
way  that  the  smallest  outlay  produces  the  largest  return. 
He  is  an  executive  and  leaves  all  details  of  administration 
to  his  subordinates,  for  whose  competency  he  is  responsible. 
It  is  to  his  creative  genius  that  we  owe  the  trust  organization 
of  American  industry,  and  to  him  has  been  applied  the 
phrase  "  Captain  of  Industry,"  as  well  as  the  term  entre- 
preneur. 

The  organizer  must  also  have  an  intimate  knowledge 
of  the  general  markets.  He  must  know  what  goods  are  in 
Markets  and  demand,  and  where  and  when  this  demand  is 
methods.  most  active ;  that  is,  where  prices  are  highest. 
He  must  likewise  have  a  thorough  knowledge  of  industrial 
processes  and  methods  of  production,  so  that  by-products 
may  be  fully  utilized  and  large  scale  production  carried  on 
efficiently. 

Next  to  the  organizer  in  this  industrial  army  is  the  manager. 
Like  the  colonel  of  a  regiment,  he  executes  the  orders  and 
carries  out  the  plans  of  his  superior  officer.     The  manager, 


The  Industrial  Army  269 

therefore,"  must  be  in  closer  touch  with  the  details  of  the 
business.  While  the  organizer  directs  from  his  New  York 
office  the  policy  of  a  whole  group  of  establishments  The 
throughout  the  country,  the  manager  is  respon-  mana«er 
sible  for  the  successful  management  of  only  one  of  these 
plants.  He  must  understand  not  only  the  local  labor 
market,  but  also  the  possibilities  of  capital  in  his  particu- 
lar branch  of  industry.  It  is  his  duty  to  bring  these  two 
together  so  that  he  may  secure  the  greatest  possible  pro- 
duction. 

Below  the  manager  is  the  superintendent,  foreman,  or 
"  boss,"  corresponding  to  the  captain,  lieutenant,  or 
corporal  of  a  military  organization.  It  is  the  The 
duty  of  the  superintendent  to  see  that  the  men  foremen- 
do  the  work  that  the  manager  has  outlined.  He  is  respon- 
sible for  the  management  of  his  department,  and  for  getting 
all  the  work  possible  out  of  the  group  under  his  charge. 
The  foreman,  as  well  as  the  "  boss,"  requires  special  ability 
to  get  along  with  the  laborers,  and  to  persuade  them  or 
compel  them  to  work  effectively.  In  the  past,  the  Irish 
have  made  the  best  "  bosses,"  but  Italians  and  Slavs  are 
now  being  used  to  direct  the  work  of  their  own  countrymen. 

We  now  come  to  the  ordinary  workers   themselves,  — 
the  rank  and  file  of  this  industrial  army.     Just  as  the 
successful  execution  of  a  general's  orders  depends, 
in  the  last  analysis,  upon  the  bravery  and  power  worker: 
of  the  great  mass  of  soldiers,  so  the  real  test  of    The  skilled 
a  nation's  efficiency  is  found  in  the  ability  and 
character  of  its  great  body  of  wage  workers.     For  con- 
venience,   the   wageworkers   may   be   divided   into    three 
groups,  —  the  skilled,  the  semi-skilled,  and  the  unskilled. 
The  skilled  worker  is  one  who  does  work  that  requires  a 


270  American  Economic  Life 

longer  or  shorter  period  of  training  or  apprenticeship. 
In  this  class  are  included  the  typesetter,  the  blacksmith, 
the  carpenter,  the  skilled  clerk  and  bookkeeper,  and  a 
host  of  others  who  have  received  more  or  less  special 
training  in  their  respective  lines  of  work. 

The  semi-skilled  worker  is  one  doing  work  that  may  be 
learned  with  comparative  ease  by  any  newcomer  who  has 
The  semi-  ordinary  intelligence  and  ability.  Although  it  is 
skilled  hard  to  give  an  accurate  definition  of  the  semi- 

skilled wageworker,  the  number  of  men  in  this 
class  is  quite  large.  For  example,  in  this  group  are  in- 
cluded the  miner,  the  brakeman,  the  motorman,  the  me- 
chanic's helper,  and  numerous  other  laborers  doing  work 
which  requires  some  little  skill  and  intelligence,  but  no 
particular  period  of  apprenticeship. 

The  unskilled  worker  represents  a  maximum  of  physical 
force  and  a  minimum  of  mental  capacity.  The  street 
„.  laborer,  the  coal  heaver,  and  the  ditch  digger 

The  un-  '  '  <  bb 

skilled  are  representatives  of  this  class.     The  number 

of  laborers  in  this  group  rapidly  increased  in 
the  nineteenth  century  by  reason  of  two  circumstances.  In 
the  first  place,  thousands  of  immigrants  to  this  country, 
who  were  unable  to  speak  the  English  language,  were 
forced  into  the  ranks  of  unskilled  labor  regardless  of  their 
native  ability.  In  the  second  place,  the  rapid  introduction 
of  machinery  often  deprived  a  skilled  worker  of  his  regular 
labor  and  forced  him  temporarily  into  the  lower  ranks, 
so  that  he  was  obliged  to  attend  to  the  machine  which 
displaced  his  own  skilled  labor. 

Large  scale  production  has  left  as  deep  an  impress  upon 
labor  as  upon  capital.  This  twofold  aspect  of  modern 
American  economic  life  presents  some  of  the  most  strik- 


The  Industrial  Army  271 

ing  problems  of  individual  and  social  welfare.     Through 
cooperation,   industrial   efficiency   has   been   secured  and 
economic  progress  attained.     This  same  principle  The 
must  be  utilized  to  attain  individual  welfare  and  conclusion, 
prosperity  in  the  rank  and  file  of  the  great  army  of  industrial 
workers. 

QUESTIONS  FOR  RECITATION 

1.  Trace  the  development  of  labor  cooperation. 

2.  Is  it  true  that  primitive  man  made  woman  do  all  the  work? 
Explain  clearly. 

3.  Explain  the  difference  between  the  second  and  third  stages 
of  labor  cooperation,  and  give  examples  of  this  difference. 

4.  Show  how  specialization  in  industry  differs  from  division  of 
labor.     Give  examples. 

5.  Show  the  development  of  all  four  stages  of  labor  cooperation 
in  the  construction  of  bridges  from  primitive  times  to  the  present 
day. 

6.  Show  the  effect  of  cooperation  on  goods ;  on  inventions. 

7.  When  industries  were  being  organized  on  a  trust  basis,  what 
new  industrial  leader  arose  ?  What  are  his  distinctive  duties  ?  What 
service  has  he  rendered  to  America  ? 

8.  Why  is  this  leader  sometimes  called  an  entrepreneur?  How 
does  the  entrepreneur  differ  from  the  single  employer  of  a  hundred 
years  ago  ? 

9.  Explain  the  duties  of  a  manager  and  his  relation  to  the  or- 
ganizer.   Is  thte  term  ever  misused?    How? 

10.  State  the  lower  grades  of  officers  in  the  industrial  army  and 
their  duties. 

11.  Classify  the  rank  and  file  of  industrial  laborers.  Describe 
the  characteristics,  and  give  examples,  of  each  group. 

12.  Describe  in  detail  the  organization  of  some  enterprise  with 
which  you  are  familiar,  conducted  on  the  basis  of  large  scale  pro- 
duction. 


272  American  Economic  Life 

PROBLEMS   FOR  DISCUSSION 

1.  What  is  the  relation  between  labor  cooperation  and  economic 
progress  ?     Explain  clearly ;  give  examples. 

2.  Discuss  the  importance  of  labor  cooperation  in  securing  in- 
creased production. 

3.  Is   labor   cooperation   increasing   or   decreasing   in   extent? 
How? 

4.  What  is  the  relation  between  labor  cooperation  and  large 
scale  production? 

5.  Is  modern  labor  cooperation  voluntary?     Explain. 

6.  Draw  a  diagram  showing  the  organization  of  labor  in  modern 
industry. 

7.  What  differences  can  be  noted  in  the  organization  of  labor 
in  the  early  colonies  and  in  the  United  States  at  the  present  time  ? 

8.  Is  the  organizer  necessary  to  modern  industry ?     Why? 

9.  What  service  has  the  organizer  rendered  America? 

10.   Is  the  supply  of  organizing  ability  limited?     If  so,  by  what? 

n.  Is  the  average  school  in  America  calculated  to  develop  or- 
ganizing ability  ?     Explain  clearly. 

12.  What  is  the  relation  between  our  school  system  and  the  wage- 
worker  ?    How  can  it  be  improved  ? 

SUPPLEMENTARY  READING 

Clay,  H.    Economics,  Chap.  II. 

Ely,  R.  T.     The  Labor  Movement  in  America. 

Ely,  R.  T.     Evolution  of  Industrial  Society,  pp.  74-98. 

Hobson,  J.  A.     The  Industrial  System. 

Levasseur,  E.     The  American  Workman. 

Seager,  H.  R.     Introduction  to  Economics,  Chap.  VIII. 

Veblen,  T.     Theory  of  Business  Enterprise,  Chaps.  Ill,  VI,  VII. 

Webb,  C.     Industrial  Cooperation. 


CHAPTER  XXIX 

Transportation  Agencies 

I.   Railroad  transportation 
i.   Its  importance 

2.  Its  rapid  growth 

3.  Centralized  control 

4.  Nature  of  the  railroad  business : 

a.  The  railroad  a  monopoly  : 

(1)  The  reasons 

(2)  Consequent  problems 

b.  The  railroad  a  "quasi  public"  corporation: 

(1)  Receives  public  aid 

(2)  Possesses  right  of  " eminent  domain" 

c.  The  conclusion 

II.   Other  transportation  agencies 

1.  The  telegraph 

2.  The  telephone 

3.  Express  companies : 

a.  Their  growth 

b.  Their  regulation : 

(1)  Why  necessary 

(2)  What  the  United  States  has  done 

4.  Electric  traction : 

a.  Urban  transportation 

b.  Rural  transportation 

c.  Electrification  of  steam  roads 

5.  Water  transportation 

6.  Progress  attained 

Another  distinct  phase  of  American  economic  life  appears 
in  the  development  of  transportation  facilities.     Foremost 

273 


274  American  Economic  Life 

among  these  facilities  is  the  railroad ;  but  growing  steadily 
in  importance  are  other  transportation  agencies,  such  as 
the  telegraph,  the  telephone,  express  companies,  electric 
traction,  and  water  transportation.  Each  of  these  demands 
separate  consideration. 

Railroad  Transportation.  —  Railroad  transportation  has 
made  possible  the  American  nation.  Politically,  it  has 
its  im-  performed  an  inestimable  service  by  bringing  the 

portance.  diverse  parts  of  the  union  within  easy  reach  of 
each  other.  To-day,  the  city  of  Washington  is  nearer  to 
San  Francisco  than  it  was,  in  early  days,  to  Boston.  From 
an  economic  standpoint,  the  service  rendered  by  the  rail- 
road has  been  no  less  profound.  It  has  bound  North  and 
South,  East  and  West  into  a  gigantic  economic  unit, 
complete  and  self-sustaining  in  all  important  respects. 
This  the  railroad  has  accomplished  by  giving  goods  "  place 
utility,"  that  is,  by  transporting  goods  from  one  place 
where  they  are  not  needed  to  another  place  where  they  are 
in  demand.  The  railroad  has  thus  become  the  connecting 
link  between  the  producer  and  the  distant  consumer.  A 
sudden  disturbance  of  this  relationship  would  result  in  the 
paralysis  of  American  economic  life. 

The  growth  of  railroad  mileage  in  the  United  States 
has  been  astonishing.  In  1830  there  were,  in  this  country, 
its  rapid  onty  twenty- three  miles  of  railroad;  in  i860 
growth.  there  were  over  thirty  thousand  miles;  in  1880, 
over  ninety- three  thousand  miles ;  in  1900,  over  one  hun- 
dred and  ninety- three  thousand  miles ;  in  19 10,  two  hundred 
and  forty  thousand  miles,  and  in  1920,  nearly  three  hundred 
thousand  miles.  This  growth  in  railway  facilities  is 
without  parallel  in  the  economic  history  of  any  other 
people. 


Transportation  Agencies  275 

Accompanying  this  increase  in  mileage  is  the  movement 
toward  centralization  of  railroad  control.  Two  hundred 
and  ten  independent  roads,  each  with  its  own  centralized 
president,  in  1883,  had  been  consolidated,  by  controL 
1907,  into  fifty  or  less.  This  movement  toward  centraliza- 
tion has  been  so  rapid  that,  if  it  continues  unchecked,  it  is 
not  idle  to  speculate  on  the  day  when  four  or  five  men, 
sitting  around  a  table,  will  control  all  the  important  track 
mileage  of  the  country.  At  present  sixty  per  cent  of  the 
mileage  of  the  United  States  is  under  the  control  of  five 
large  interests.  During  the  period  of  government  opera- 
tion, naturally  all  the  important  mileage  of  the  country 
was  under  the  control  of  one  central  authority. 

The  true  significance  of  railroad  concentration  becomes 
apparent  only  when  one  considers  the  nature  of  the  rail- 
road business.  The  railroad  is  a  partial  mo-  its  nature: 
nopoly ;  that  is,  it  performs  a  service  which  few  A  monopoly. 
other  agencies  perform,  the  cost  of  which  decreases  with 
the  increase  in  the  volume  of  business.  The  initial  cost  of 
constructing  a  railroad  is  so  great  that,  from  a  social  point 
of  view,  it  is  an  economic  waste  to  construct  another  line  to 
duplicate  the  work  of  the  first  road.  Moreover,  after  the 
trackage,  terminal  facilities,  and  rolling  stock  have  once 
been  provided,  an  increase  in  the  volume  of  business  does 
not  mean  a  corresponding  increase  in  the  expense  of  opera- 
tion. In  fact,  the  unit  expense  diminishes  as  the  business 
increases,  and  the  railroad  therefore  benefits  by  what  is 
called  the  "  law  of  increasing  returns." 

In  spite  of  legal  prohibition,  railroads  in  the  past  have 
used  their  monopoly  power  unfairly.  For  example,  the 
law  declares  that  railroads,  in  transporting  commodities, 
shall  not  discriminate  between  individuals,  but  shall  offer 


276  American  Economic  Life 

their  services  to  all  on  equal  terms.  Nevertheless,  because 
of  the  law  of  increased  returns,  the  traffic  manager  is  ever 
tempted  to  accept  extra  business  at  a  lower  rate.  This 
conflict  between  railroad  profits  and  public  interests  some- 
times leads  to  a  violation  of  the  principle  of  equal  rates 
for  equal  service,  and  has  resulted  in  the  practice  of  grant- 
ing rebates  to  favored  corporations. 

Another  distinctive  feature  of  the  railroad  is  its  close 
dependence  upon  the  government.  This  close  relation 
A  „  .  between  the  railroad  and  the  public  has  caused 
public "  the  railroad  to  become  a  "quasi  public  "  corpora- 
tion. In  bringing  about  this  situation  two 
factors  are  chiefly  responsible.  In  the  first  place,  rail- 
roads from  the  earliest  times  have  received  financial  aid 
from  the  states.  In  addition  to  this,  the  national  govern- 
ment has  not  only  advanced  money,  but  also  contributed 
thousands  of  acres  of  public  land.  Thus,  railroads  are 
especially  indebted  to  the  public,  and  are  therefore  clearly 
marked  off  from  ordinary  private  economic  activities. 

But  of  even  greater  public  significance  is  the  railroad's 
right  of  "  eminent  domain."  According  to  this  right,  a 
state,  upon  the  payment  of  just  compensation,  may  take 
private  property  for  public  use  even  against  the  will  of  the 
owner.  To  facilitate  the  railroad  in  performing  its  service, 
the  state  has  delegated  this  right  to  the  transportation 
company  and  thus  endowed  it  with  extraordinary  power. 
Railroads  are  peculiarly  indebted  to  the  public,  and  those 
who  manage  them  should  pay  especial  regard  to  public 
welfare.  They  are  not  free  to  charge  what  rates  they 
choose,  to  decide  what  sections  of  the  country  shall  prosper, 
or  what  private  interests  shall  thrive  at  the  expense  of  the 
public  good. 


Transportation  Agencies  277 

Besides  the  importance  which  it  derives  from  its  quasi 
public  nature,  the  railroad  business  is  of  tremendous 
magnitude.  According  to  statistics  of  the  Inter-  The 
state  Commerce  Commission  in  191 7  the  labor  c°nc^ion. 
employed  in  railroading  numbered  about  1,500,000;  the 
capital  invested  approximated  $20,000,000,000 ;  and  the 
gross  earnings  amounted  to  $3,000,000,000.  Thus,  in  the 
number  of  laborers  employed  and  in  the  amount  of  capital 
invested  railroading  is,  next  to  agriculture,  the  greatest 
single  business  in  the  United  States. 

Other  Transportation  Agencies.  —  While  the  railroad  is 
by  far  the  most  important  transportation  agency  in  the 
United  States,  there  are  other  agencies  which  play  a  great 
part  in  promoting  national  prosperity  and  efficiency. 
Chief  among  these  are  telegraph,  telephone,  and  express 
companies,  which,  together  with  electric  traction,  constitute 
an  exceedingly  important  group  of  transportation  agencies. 

The  telegraph  developed  along  the  lines  of  railway  com- 
munication. With  improvements  in  the  railroad  system, 
it  became  necessary  to  have  some  means  of  The  tele- 
speedy  communication,  not  only  between  rail-  graph- 
road  stations,  but  also  between  signal  towers.  Since  the 
telegraph  was  the  earliest  means  of  instant  communica- 
tion, telegraph  and  railroad  lines  at  first  everywhere 
paralleled  one  another.  With  the  opening  of  the  present 
century,  however,  this  community  of  interests  was  not 
always  maintained. 

During  the  last  quarter  of  the  nineteenth  century,  the 
telegraph  met  a  keen  competitor  in  a  new  device  —  the 
telephone.     Unlike    the    telegraph,    which    was  Theteie- 
immediately  used  for  long  distance  communica-  Phone- 
tion,  the  telephone  at  first  was  employed  only  to  communi- 


278  American  Economic  Life 

cate  within  buildings,  or  to  communicate  between  places 
within  the  same  city.  Gradually,  however,  the  sphere  of 
the  telephone  was  broadened,  until,  to-day,  a  conversa- 
tion between  New  York  and  San  Francisco  is  an  ordinary 
occurrence.  Despite  the  efforts  of  the  telegraph  companies 
to  secure  trade,  through  the  introduction  of  the  "  night 
letter "  and  similar  innovations,  the  telephone  has 
largely  supplanted  the  telegraph  as  a  direct  and  effective 
means  of  short  distance  communication. 

Of  quite  a  different  character  is  the  transportation  fur- 
nished by  express  companies.  While  heavy  commodities 
are  transported  by  freight,  small  packages  require 
companies:  a  speedier,  easier  method  of  transportation. 
Their  Therefore,  the  express  business  was  developed  in 

the  United  States.  Express  companies  developed 
side  by  side  with  the  early  railroads,  until  a  strong  com- 
munity of  interests  arose  between  them,  and  a  close  identi- 
fication of  business  relationships  followed. 

At  first,  the  express  business  was  organized  locally  and 
conducted  by  a  number  of  separate  companies.  Soon, 
Their  reg-  however,  this  business,  while  not  under  one 
ulation.  formal  unified  control,  was  nevertheless  com- 
bined into  one  great  system  operated  on  a  business  under- 
standing so  effectual  that  territory  was  divided  and  rates 
agreed  upon  without  a  sign  of  competitive  spirit.  As  a 
result  of  this  understanding,  express  rates  in  the  United 
States  at  the  opening  of  the  twentieth  century  were  very 
high. 

As  a  means  of  obviating  private  extortion  in  the  carriage 
of  small  packages,  Europe  was  first  to  adopt  the  parcel 
post  system.  For  a  very  low  charge,  the  government 
carried  packages  of  considerable  size  and  thereby  com- 


Transportation  Agencies  279 

peted  with  the  private  express  companies.  In  the  United 
States  the  private  companies  worked  consistently,  and, 
for  a  long  time,  effectively,  against  the  passage  of  parcel 
post  legislation.  However,  in  1913,  after  long-continued 
agitation,  a  parcel  post  law  was  finally  enacted.  The 
rates  under  this  law  were  so  low  that  in  the  following 
year  the  United  States  Express  Company,  a  private  corpora- 
tion, was  forced  out  of  business. 

The  form  of  transportation  which,  recently,  has  had  the 
most  rapid  growth  is  electric  traction.  While  electric  cars 
were  operated  during  the  last  two  decades  of  the  Electric 
nineteenth  century,  it  was  not  until  the  very  *»<*"» ! 
close  of  the  century  that  the  "  boom  "  in  electric  traction 
began.  Since  that  time  financiers  have  turned  their  atten- 
tion to  electric  traction  operations. 

The  electric  traction  problem  has  three  distinct  phases, 
—  urban  transportation,  rural  transportation,  and  elec- 
trification of  steam  roads.     The  concentration  TT . 

Urban 

of  population  in  large  cities  has  made  the  prob-  trans- 
lem  of  urban  transportation  most  acute. 
While  cities  have  grown  greatly  in  extent,  the  business 
center  has  remained  comparatively  small.  Therefore, 
the  increased  population  of  the  outlying  regions  must  have 
some  means  of  rapid  transit.  With  a  maximum  of  speed 
and  a  minimum  of  expense  in  operation,  the  electric  car 
offers  by  far  the  most  effective  means  of  transporting 
the  city  dweller  to  his  place  of  work. 

At  the  same  time  that  street  railways  have  been  electrified 
and  extended,  inter-city  and  rural  electric  lines  have  been 
developed.     As    compared    with    steam    roads,   Rurai  trans. 
the  cost  of  installing  and  operating  such  lines  is  P°riation- 
small.     Consequently,    electric    traction    facilities    have 


280  American  Economic  Life 

been  afforded  sparsely  settled  districts  where  steam  trans- 
portation would  have  been  unprofitable.  Furthermore,  a 
steam  road,  requiring  a  comparatively  level  bed,  necessi- 
tates heavy  cutting  and  filling.  On  the  other  hand,  an 
electric  car  climbs  almost  any  hill,  and  the  cost  of  grading 
is  thus  reduced  to  a  minimum.  Hence,  the  rural  electric 
line  reaches  many  points  not  accessible  by  the  steam  rail- 
way. In  this  manner,  electric  traction  has  proved  a  real 
boon  to  the  country  dwellers. 

The  third  phase  of  electric  traction  —  the  electrification 
of  steam  roads  now  in  use  —  has  as  yet  barely  begun. 
V1  ,  .,         The  New  York  Central  road  has  electrified  some 

Electrifica- 
tion of  suburban  lines  running  out  of  New  York  City 

with  gratifying  results,  while  the  Pennsylvania 
Railroad  has  begun  the  work  of  electrifying  all  its  suburban 
lines.  Since  such  electrification  is  profitable  in  cases  of 
growing  suburban  districts,  it  is  more  than  likely  that, 
during  the  next  few  decades,  all  the  suburban  steam  roads 
running  out  of  the  larger  American  cities  will  be  electri- 
fied. 

In  considering  agencies  of  transportation  we  must  not 
overlook  the  possibilities  of  water  transportation.  In 
Wat  an    earlier    chapter   we    have    already   pointed 

trans-  out   the   unsurpassed   system  of  waterways  in 

por  a  ion.  ^e  United  States,  and  their  great  advantage  to 
commerce  because  of  the  decreased  cost  of  water  trans- 
portation. The  Panama  Canal  will  prove  to  be  especially 
stimulating  to  the  American  coastwise  traffic,  particularly 
if  American  ships  engaged  in  this  commerce  are  again 
accorded  free  passage  through  the  Canal.  Of  even 
greater  importance,  however,  is  the  question  of  a  merchant 
marine.     The  World  War  gave  to   the  United  States   a 


Transportation  Agencies  281 

merchant  marine  four  times  greater  than  it  possessed 
before  the  outbreak  of  hostilities.  It  created  for  the  Ameri- 
can people  a  great  ocean-going  fleet  of  10,000,000  tons  at  a 
cost  of  more  than  $3,000,000,000.  Whereas,  in  1910,  only 
eight  per  cent  of  the  imports  and  exports  of  the  United 
States  were  carried  in  American  vessels,  in  191 9  nearly 
twenty-eight  per  cent  of  American  foreign  trade  was 
so  carried.  The  problem  that  confronts  us  is  to  main- 
tain, and  increase  in  the  future,  the  American  tonnage  of 
ocean-going  ships.  This  can  only  be  done  through  some 
form  of  wise  governmental  action  which  will  make  it 
possible  for  the  American  shipbuilding  industry  to  compete 
successfully  with  its  European  rivals. 

The  means  of  transportation  are  the  arteries  of  American 
business  and  social  life.  At  the  opening  of  the  nineteenth 
century,  the  American  people  traveled  on  land  progress 
and  water  at  the  same  rate  that  Julius  Caesar  attained- 
traveled  centuries  before.  Since  the  Roman  roads  were  so 
superior  to  our  own,  modern  land  transportation  may  have 
even  been  inferior  to  that  of  the  ancients.  But,  during 
this  one  century,  marvelous  progress  was  made  in  the 
means  and  methods  of  transportation.  Space  and  time 
were  annihilated,  distant  places  connected,  goods  and 
persons  easily  transported,  and  communication  between 
distant  places  established.  The  future,  too,  holds  out 
unknown  possibilities  for  the  automobile  truck  and  the 
magic  airship. 

QUESTIONS  FOR  RECITATION 

1.  Explain  the  importance  to  the  nation  of  the  railroad  (1)  from 
a  political  standpoint,  and  (2)  from  an  economic  standpoint. 

2.  Trace  the  development  of  American  railroads,  both  in  mileage 
and  in  management,  from  1880  to  the  present  time. 


282  American  Economic  Life 

3.  Give   the   distinct   characteristics  of  the  railroad  business, 
contrasting  it  in  these  respects  with  the  manufacturing  industries. 

4.  Explain  clearly  why  the  railroad  tends  to  become  a  monopoly 
and  the  consequences. 

5.  Explain  the  meaning  of  the  law  of  increasing  returns. 

6.  Show  why  the  railroad  is  a  quasi  public  corporation. 

7.  Why  has  the  state  delegated  the  right  of  eminent  domain  to 
the  railroad  ? 

8.  Is  agriculture  or  railroading  more  important ?    Why? 

9.  Contrast  the  development,  and  the  function,  of  the  telegraph 
and  the  telephone. 

10.  Explain  why  it  was  necessary  to  regulate  express  companies, 
and  what  Congress  has  accomplished  in  this  direction. 

n.  What  are  the  three  chief  forms  of  electric  traction?  Explain 
why  each  is  important. 

12.  Explain  the  importance  of  inland  water  transportation  in  the 
United  States. 

13.  State  the  growth  of  the  American  merchant  marine  during 
the  World  War.  Explain  this  growth.  What  do  you  think  of  its 
future  possibilities  ? 

14.  Contrast  present  day  methods  of  transportation  with  those 
of  ancient  times. 

PROBLEMS  FOR  DISCUSSION 

1.  In  what  sense  is  transportation  productive? 

2.  Why  is  transportation  a  greater  and  more  difficult  problem 
in  the  United  States  than  in  most  countries  of  Europe  ? 

3.  How  would  the  sudden  cessation  of  all  railroad  traffic  affect 
the  life  of  the  American  people  ? 

4.  If  there  were  no  railroads,  would  there  be  any  "trusts"? 

5.  If  one  person  rides  on  a  pass,  who  pays  for  that  ride? 

6.  How  does  the  Pennsylvania  Railroad  differ  from  a  large  de- 
partment store  in  regard  to  its  freedom  in  making  rates  or  prices  ? 

7.  What  effect  has  the  prosperity  of  the  railroads  on  the  steel 
industry  ?    Explain  fully.     On  other  industries  ? 

8.  Have  American  railroads  in  general  followed  or  directed  the 
course  of  settlement  of  the  country  ?    Why  ? 


Transportation  Agencies  283 

9.  Would  private  capital  have  been  invested  in  railroad  build- 
ing, if  the  chance  of  extraordinary  gain  had  been  greater  in  other 
industries  ?    Explain  clearly. 

10.  Are  local  famines  likely  to  be  as  serious  in  China  in  the  future 
as  in  the  past  ?    Why  not  ? 

11.  Has  railroad  transportation  relieved  or  aggravated  the  prob- 
lem of  congestion  in  great  cities  ? 

12.  Discuss  the  arguments  for  and  against  a  governmental  policy 
of  granting  ship  subsidies. 

13.  Give  the  arguments  for  and  against  the  free  passage  of  Ameri- 
can coastwise  ships  through  the  Panama  Canal. 

SUPPLEMENTARY  READING 

Acworth,  W.  M.     Elements  of  Railway  Economics. 

Carver,  T.  N.     Principles  of  Political  Economy,  Chap.  XIX. 

Johnson,  E.  R.     American  Railway  Transportation. 

Johnson,  E.  R.     Elements  of  Transportation. 

Johnson,  E.  R.     Ocean  and  Inland  Water  Transportation. 

Moulton,  H.  G.     Waterways  versus  Railways. 

Smith,  J.  R.     The  Ocean  Carrier. 


CHAPTER  XXX 
Regulation  of  Railroads 

I.   The  early  situation 
i.   Power  of  Congress  : 

a.  The  original  clause 

b.  Why  power  was  granted 

c.  How  first  applied 
2.    Growth  of  railroads  : 

a.  How  favored  at  first 

b.  What  evils  crept  in 

c.  The  changed  attitude 

II.   The  Interstate  Commerce  Act 


Main  provisions 

Powers  of  Commission 

Why  discriminations  were  prohibited 

Other  results  of  the  act 

The  defects 


III.   Later  legislation 

i.   Effect  of  Anti- trust  Act 

2.  Act  of  1903 

3.  Act  of  1906 

4.  Act  of  1910 

5.  War-time  regulation : 

a.  Government  operation 

b.  Act  of  1920 : 

(1)  Commission's  powers 

(2)  Other  provisions 

6.  Importance  of  regulation 

7.  The  outlook 

284 


Regulation  of  Railroads  285 

The  Early  Situation.  —  The  Constitutional  Convention 
of  1787  gave  the  national  government  the  following  power 
over  commerce,  —  "  Congress  shall  have  power  Power  of 
to  regulate  commerce  with  foreign  nations,  and  Congress: 
among  the  several  states,  and  with  the  Indian  The  clause- 
tribes."  The  most  significant  point  about  this  provision 
is  its  general  and  inclusive  nature.  The  word  "  commerce  " 
has  proved  to  be  so  embracing  that  Congress  has  been 
enabled,  with  the  lapse  of  time,  to  exercise  powers  over  ac- 
tivities that  could  not  have  been  foreseen  by  the  framers 
of  the  Constitution.  With  the  application  of  steam  to 
industry  and  transportation,  commercial  activities  have 
so  widened  that  the  national  government,  through  this 
clause,  has  been  able  to  exercise  a  restraining  control 
over  many  anti-social  tendencies  in  American  economic 
life. 

The  necessity  of  giving  the   central   government   some 
power  over  interstate  commerce  was  one  of  the  leading 
reasons  for  framing  the  new  constitution.     The  Why  the 
conflicting  interests  that  resulted  from  giving  power  was 
the  individual   states    control    over    commerce  grane  ' 
proved  conclusively,  during  the  regime  of  the  Articles  of 
Confederation,  that  some  federal  regulation  of  commerce 
was    absolutely    necessary.     Therefore,    when    the    new 
constitution  was  drawn  up,  Congress  was  given  exclusive 
power  to  regulate  interstate  commerce. 

This  new  power  of  Congress  was  at  first  applied  to  the 
regulation    of    water    transportation    between    different 
states,  since  waterways  (aside  from  roads)  were  How  first 
the  earliest  means  of  transporting  goods  and  aPPUed- 
persons  from  one  place  to  another.     But,  with  the  im- 
petus given    to   railroad   construction  in   the   epoch  fol- 


286  '        American  Economic  Life 

lowing  the  Civil  War,  the  regulation,  not  of  water, 
but  of  land  transportation  became  the  absorbing  prob- 
lem. 

At  first,  the  railroad  was  encouraged  because  it  proved  a 
blessing  to  newly  developing  communities.  Cities  and 
Gr  wth  f  states  vied  with  one  another  in  buying  railroad 
railroads:  securities,  in  granting  immunity  from  taxation, 
Eow  and  in  affording  every  inducement  for  railroad 

favored. 

construction.  To  these  growing  communities, 
the  railroad  afforded  the  opportunity  to  ship  out  the  com- 
modities which  they  produced,  and  to  bring  in  the  goods 
which  they  needed. 

This  enthusiasm  was,  however,  short-lived.  The  rail- 
roads developed  with  even  greater  rapidity  than  had  been 
What  evils  anticipated;  and,  with  their  development, 
crept  in.  came  an  increase  in  monopoly  power  upon  which 
railroad  enthusiasts  had  not  counted.  To  be  sure,  the 
railroads  had  their  advantages ;  but  the  extortionate  rates 
and  the  discriminations  between  shippers  and  towns  more 
than  offset  the  increased  commercial  facilities  which  the 
railroads  afforded. 

Consequently,  a  storm  of  indignant  protest  was  directed 
against  railroad  activities.  Instead  of  encouragement, 
The  they  now  received   strong  condemnation.     By 

changed  1870,  the  cry  against  extortionate  rates  was  com- 
mon in  all  parts  of  the  country,  but  particularly 
in  the  agricultural  states  of  the  newly  developing  Middle 
West.  Stringent  state  laws  were  passed;  but,  since  the 
railroads  were  engaged  in  interstate  business,  they  well 
knew  that  attempts  of  individual  states  to  regulate  their 
activities  would  prove  ineffectual.  Some  form  of  federal 
regulation  therefore  became  imperative. 


Regulation  of  Railroads  287 

The  Interstate  Commerce  Act.  —  In  1887  this  situation 
culminated  in  the  passage  of  the  famous  Interstate  Com- 
merce Act,  which  was  directed  at  interstate  pas-  Main  pro. 
senger  and  freight  traffic  carried  by  railroad  or  v^10118- 
by  railroad  and  water.  This  Act  of  1887  includes  five  main 
provisions:  (1)  unreasonable  or  extortionate  rates  were 
prohibited ;  (2)  discriminations  between  persons,  places, 
and  commodities  were  made  illegal;  (3)  fares  and  rates 
were  to  be  made  public ;  (4)  common  carriers  were  not  to 
charge  or  receive  a  greater  rate  in  the  aggregate  for  trans- 
porting passengers  or  freight  under  substantially  similar 
circumstances  and  conditions,  for  a  shorter  than  for  a 
longer  distance,  over  the  same  line,  in  the  same  direc- 
tion, the  shorter  being  included  within  the  longer  dis- 
tance; (5)  pooling  transactions  between  railroads  were 
prohibited. 

In  order  to  enforce  this  law,  a  Commission  consisting  of 
five  members,  appointed  by  the  President  with  the  consent 
of  the  Senate,  was  created.     Subsequently  the  Commis. 
number  of  commissioners  was  increased  to  seven  sion's  . 
and  the  term  of  office  fixed  at  seven  years.     The  power" 
Commission    was    empowered    to    investigate    rates    and 
alleged  discriminations,  and,  where  necessary,  to  bring  suit 
before  the  courts.     Orders  issued  by  the  Commission  were 
not  binding,  should  the  common  carrier,  against  whom  the 
orders  were  issued,  choose  to  appeal  to  the  courts.     Where 
an  appeal  was  taken,  the  Commission  and  the  carrier  went 
through  the  regular  process  of  suing  and  being  sued,  and 
the  decision  of  the  court  was  final. 

The  provision  regarding  unreasonable  and  extortionate 
rates  was  based  upon  the  English  common  law  against 
extortion.     The  discriminations  between  persons,  places, 


288  American  Economic  Life 

and  commodities  had  grown  up  with  the  railroad  industry. 
By  charging  lower  rates  to  one  shipper  than  to  another,  the 
railroad  determined  which  of  the  two  should 
criminations  remain  in  business;  by  giving  more  favorable 
were  pro-       rates  to  one  town  than  to  another,  the  railroad 

hibited.  m  7 

determined  which  town  should  advance  com- 
mercially ;  and  by  arranging  the  rates  of  two  commodities, 
such  as  flour  and  wheat,  the  railroad  determined  whether 
wheat  should  be  shipped  from  the  wheat  fields  to  Minne- 
apolis and  there  ground  into  flour,  or,  whether  it  should 
be  shipped  from  the  wheat  fields  to  the  flour  mills  of  the 
Eastern  coast.  In  any  one  of  these  cases,  the  railroad  was 
an  arbiter  possessed  of  despotic  power.  Had  it  proved  a 
benevolent  despot,  all  might  have  been  well;  but,  unfor- 
tunately, the  use  made  of  this  power  was  in  many  cases 
disastrous  to  the  parties  concerned. 

The  publication  of  rates  required  by  the  new  law  gave 
all  an  opportunity  to  secure  the  same  terms  from  the  rail- 
other  roads ;  while  the  "  long  and  short  haul  "  clause 
results.  was  aimed  against  the  abuse  of  granting  a  rate, 
from  one  city  to  the  next  city,  lower  than  the  rate  between 
an  intermediate  small  town  and  one  of  the  cities  in  ques- 
tion. In  an  attempt  to  stimulate  competition,  pooling  was 
prohibited. 

This  last  provision  regarding  pooling  was  perhaps  the 

most  difficult  for  the  railroads  to  obey.     Since  so  many 

restrictions  had  been  imposed  upon  them,  pool- 

The  defects.    .  ,  f  /    ,      , 

ing  seemed  to  be  the  only  method  of  agreement 
left  to  the  railroads.  When  deprived  of  this,  they  were 
forced  into  combination.  Another  defect  was  the  limited 
power  given  to  the  Interstate  Commerce  Commission. 
To  remedy  this,  subsequent  legislation  was  enacted.     In 


Regulation  of  Railroads  289 

all  the  subsequent  acts,  however,  the  principles  underlying 
the  original  law  have  been  generally  maintained. 

Later  Legislation.  —  In  1890,  the  Sherman  Anti- trust 
Law  was  passed.  Although  the  primary  purpose  of  this 
act  was  to  break  up  industrial  combinations,  Effectof 
certain  judicial  decisions  have  been  responsible  Antitrust 
for  applying  this  law,  to  a  limited  extent,  to  the 
railroads.  When  pooling  was  declared  illegal  in  1887, 
the  railroads  entered  into  certain  associations  for  the  pur- 
pose of  making  rate  agreements.  In  1897,  tne  Supreme 
Court  declared  these  agreements  illegal  because  they  vio- 
lated the  Sherman  Anti- trust  Act  of  1890.  Again,  in  1904, 
the  Supreme  Court,  on  the  same  grounds,  ordered  the 
dissolution  of  the  Northern  Securities  Company,  a  holding 
company,  organized  for  the  purpose  of  holding  the  capital 
stock  of  the  Great  Northern,  Northern  Pacific,  and  Bur- 
lington systems,  the  first  two  of  which  were  competing 
systems.  Furthermore,  in  191 2,  a  similar  decision  dis- 
solved the  merger  of  the  Union  Pacific  and  the  Southern 
Pacific  railroads,  because  the  former  held  indirectly  forty- 
six  per  cent  of  the  stock  of  the  latter  company. 

At  the  opening  of  the  twentieth  century,  through  the 
influence  of  President  Roosevelt,  Congress  passed  more 
specific  railway  legislation.  In  this  manner;  the 
Act  of  1903,  known  as  the  Elkins  Law,  increased 
the  effectiveness  of  the  Interstate  Commerce  Commission 
by  making  a  corporation  as  well  as  its  agent  liable  to  prose- 
cution; by  increasing  the  penalties  imposed  under  the 
original  Interstate  Commerce  Act;  by  permitting  the 
Commerce  Commission  to  secure  injunctions  from  the 
United  States  Circuit  Courts ;  and  by  directing  the  Attor- 
ney General  to  prosecute  under  the  act.     This  law  expedited 


290  American  Economic  Life 

the  work  of  the  Commission  by  permitting  an  appeal, 

in  interstate  commerce  cases,  to  be  made  more  directly 

to  the  Supreme  Court. 

A  law  passed  in  1906  increased  the  administrative  power 

of  the  Commission  by  permitting  it  to  revise  railway  rates. 

Up  to  that  time,  the  Commission  could  only 
Act  of  1906.     ,     .         '  .  , , 

declare  that  a  certain  rate  was  unreasonable. 

Under  the  new  law,  it  might  state  what  rate  was  reasonable 

by  fixing  a  maximum   rate.     In  addition,   its  authority 

was  extended  to  all  express,  sleeping  car,  and  pipe  line 

companies  doing  an  interstate  business.     The  law  made 

further  provisions  which  enabled  the  Commission  to  secure 

uniform  accounting. 

In  1 9 10  additional  railroad  legislation  created  a  special 

Commerce  Court  in  which  railroad  cases  were  to  be  tried. 

Sometimes  friction  had  prevailed  between  the 

Act  of  1910.  .  ...  .     ,      T  ~ 

regular  courts  of  justice  and  the  Interstate  Com- 
merce Commission;  and  the  latter  body,  which  had  no 
status  as  a  court,  was  subject  to  petty  annoyances  and 
delays.  It  was  hoped  that  this  new  court  would,  therefore, 
facilitate  the  execution  of  the  findings  of  the  Commission. 
However,  the  painful  experience  of  the  short-lived  Com- 
merce Court  proved  otherwise,  and,  in  1913,  this  Court 
was  abolished. 

When  the  United  States  became  involved  in  the  World 
War,  it  was  necessary  to  establish  a  unified  control  over 

the  chief  transportation  agencies  of  the  country, 
regulation:  Accordingly,  on  January  1,  1918,  the  President 
Government     0f  the  United  States  placed  the  railroads  of  the 

nation  under  the  direction  of  the  Director  Gen- 
eral of  Railroads.  For  a  period  of  twenty-six  months  the 
railroads  were  operated  by  the  United  States  government. 


Regulation  of  Railroads  291 

About  the  same  time  the  government  took  over  the  control 
of  the  telegraph  and  telephone  lines  of  the  country.  The 
exigencies  of  war  made  it  absolutely  necessary  for  the 
government  to  operate  the  roads  in  order  that  troops  might 
be  speedily  dispatched  abroad,  and  that  priority  of  trans- 
portation might  be  given  to  such  absolute  necessities  as 
wheat,  coal,  and  ammunition  supplies.  During  this  period 
of  government  operation  the  railroads  performed  an  heroic 
service  for  the  nation;  but,  when  it  was  accomplished, 
they  found  themselves  sorely  in  need  of  capital  to  replace 
the  rolling  stock  and  freight  facilities  neglected  during  that 
period. 

On  March  1,  1920,  the  railroads  were  returned  to  private 
ownership  under  the  provisions  of  the  Esch-Cummins 
Act.     According  to  this  act  the  Interstate  Com- 

r^  •       •  .11  r       i  Act  Of  IQ20. 

merce  Commission  remains  the  keystone  of  the 
arch  of  railroad  legislation,  and  is  given  still  greater  gov- 
ernmental control  over  the  railroads.  This  is  accomplished 
by  centering  further  authority  and  responsibility  in  the 
Commission,  by  requiring  this  body,  from  time  to  time,  to 
determine  and  publish  what  percentage  of  railroad  property 
values,  i.e.  what  dividend,  constitutes  a  fair  return  for 
the  investors,  and  to  adjust  rates  so  that  the  efficient  roads 
at  least  will  be  able  to  earn  that  much  for  their  owners  and 
creditors.  The  act  itself  provided  how  much  this  "  fair 
return  "  was  to  be  for  the  first  two  years  of  private  restora- 
tion, namely,  five  and  one-half  per  cent,  with  the  promise 
that  the  Commission  might  during  that  time  allow,  in  its 
discretion,  an  extra  one-half  per  cent  toward  capital  ex- 
penditures. Furthermore,  the  Commission  was  instructed 
to  formulate  plans  for  the  consolidation  of  the  railroads 
of  the  country  into  a  limited  number  of  systems,  so  that 


292  American  Economic  Life 

the  financially  weaker  roads  might  profit  by  consolidation 
with  the  larger  and  more  prosperous  roads.  The  Com- 
mission was  also  given  full  powers  regarding  car  service, 
joint  facilities,  new  construction  and  abandonment  of 
roads,  priority  and  embargo  regulations,  and  new  methods 
of  financing. 

The  Act  of  1920  provides  further  for  the  creation  of  a 
revolving  credit  fund  of  $300,000,000 ;  it  introduces  the 
principle  of  profit  sharing  with  the  government,  and  in- 
cludes a  complete  system  for  the  settlement  of  labor  dis- 
putes, embracing  local  adjustment  boards  and  a  central 
Railroad  Labor  Board.  The  act  introduces  the  principle 
of  profit  sharing  by  allowing  the  government  half  of  the 
profits  in  excess  of  six  per  cent  which  the  railroads  may 
earn.  The  provisions  regarding  the  labor  boards  are 
exceedingly  important.  The  act  specifically  creates  a 
Railroad  Labor  Board  of  nine  members,  representing 
equally  the  workers,  the  managers,  and  the  public,  appointed 
by  the  President  with  the  approval  of  the  Senate,  from  lists 
of  six  names  each,  in  the  case  of  workers'  and  managers' 
nominees,  submitted  to  him  by  the  parties  of  interest. 
The  Railroad  Labor  Board  not  only  deals  with  appeals, 
but  also  has  powers  of  original  initiative.  It  relies  upon 
full  publicity  for  the  enforcement  of  its  decisions. 

The  problem  of  railroad  regulation  is  doubly  significant. 
It  is  necessary  of  solution  not  only  for  itself,  but  also  for 
j       t  the  purpose  of  showing  the  method  of  govern- 

of  regu-  mental  procedure  in  regard  to  properly  control- 
ling all-  forms  of  large  scale  production.  Trans- 
portation agencies  enjoy  such  a  monopolistic  position  that 
they  can  practically  determine  the  welfare  of  individuals, 
of  communities,  and  of  industries.     Since  it  is  antagonistic 


Regulation  of  Railroads  293 

to  social  welfare  that  such  great  power  should  rest  uncon- 
trolled in  the  hands  of  private  individuals,  society,  through 
proper  legislation,  must  protect  its  own  interests  while 
duly  regarding  the  rights  of  its  individual  members. 
If,  therefore,  the  nation  succeeds  in  solving  the  rail- 
road problem,  the  experience  so  acquired  may  be  ap- 
plied not  only  to  the  solution  of  questions  relating  to 
public  utilities,  but  also  to  similar  problems  of  monopolistic 
production. 

That  the  attitude  toward  business  is  tending  in  this 
direction  is  seen  in  the  establishment  of  the  Federal  Trade 
Commission,  and  in  the  authority  given  to  the  The 
Interstate  Commerce  Commission,  in  1914,  to  outlook- 
enforce  the  Clayton  Anti-trust  Act  so  far  as  it  applies  to 
common  carriers.  Further  evidence  of  the  intention  of 
the  government  to  control  monopoly  is  found  in  the  exten- 
sion of  the  powers  of  the  Interstate  Commerce  Commission 
not  only  over  steam  railways,  but  also  over  electric  rail- 
ways, telegraph,  telephone,  and  cable  companies,  and  to 
some  extent  over  water  carriers ;  in  prohibiting  interstate 
railways  from  having  interests  in  competing  water  carriers ; 
and  in  forbidding  railroad  companies  engaged  in  interstate 
commerce  from  transporting  goods,  other  than  timber  and 
its  products,  which  have  been  mined  or  manufactured  under 
the  authority  of  the  railroad  companies  concerned.  When 
we  consider,  therefore,  the  progress  attained  by  the  United 
States,  since  the  opening  of  the  twentieth  century,  in  this 
direction  alone,  the  eventual  regulation  of  monopolistic  pro- 
duction in  all  its  forms  seems  assured. 


294  American  Economic  Life 

QUESTIONS  FOR  RECITATION 

i.  Explain  the  power  of  Congress  over  commerce.  Show  its 
significance. 

2.  Why  did  the  Articles  of  Confederation  prove  unsatisfactory? 
How  was  this  defect  remedied  ? 

3.  How  did  Congress  first  exercise  its  power  over  commerce? 
What  effect  had  the  invention  of  the  steamboat  in  this  direction  ? 

4.  When  the  steam  railroad  first  appeared,  how  was  it  favored  ? 
Why? 

5.  How  did  it  afterward  abuse  its  privileges?  What  demand 
grew  out  of  this  abuse  ? 

6.  State  the  main  provisions  of  the  Interstate  Commerce  Act. 
Show  why  each  was  necessary. 

7 .  What  are  rebates  ?    Why  are  such  discriminations  made  illegal  ? 

8.  State  the  original  powers  of  the  Interstate  Commerce  Com- 
mission. Show  how  these  powers  were  successively  enlarged  by 
(1)  the  Act  of  1903,  (2)  the  Act  of  1906,  and  (3)  the  Act  of  1920. 

9.  When  pooling  was  declared  illegal,  to  what  did  the  railroads 
resort  and  for  what  purpose  ? 

10.  Explain  clearly  how  the  Sherman  Anti-trust  Act  was  applied 
to  railroad  combinations.     Give  at  least  two  examples. 

11.  When  railroad  mergers  are  dissolved  by  order  of  the  court, 
what  are  the  practical  results  of  such  action  ? 

12.  Why  was  the  Commerce  Court  abolished? 

13.  Why  was  it  necessary  for  the  United  States  government  to 
operate  the  railroads  during  the  World  War  ?  To  whom  was  this 
operation  intrusted? 

14.  What  were  the  effects  of  government  operation  ?  Was  this  an 
experiment  in  socialism? 

15.  When  and  why  were  the  railroads  returned  to  private  owner- 
ship and  management  ? 

16.  Explain  the  main  provisions  of  the  Esch- Cummins  Act  of 
1920  in  regard  to  (1)  the  powers  of  the  Commission,  (2)  the  "fair 
return"  provision,  (3)  the  government  profit  sharing  plan,  and 
(4)  the  method  of  settling  labor  disputes. 

17.  What  restrictions  are  placed  upon  railroads  with  regard  to 
(1)  commodities  transported,  (2)  shipping  interests  ? 


Regulation  of  Railroads  295 

18.  Why  is  the  solution  of  the  railroad  problem  vital  to  national 
welfare? 

19.  What  is  likely  to  be  the  future  of  big  business  in  this  country? 
State  your  reasons. 

PROBLEMS  FOR  DISCUSSION 

1.  Why  does  the  question  of  the  control  of  the  railroads  in  the 
interest  of  the  public  present  especial  difficulties  in  America? 

2.  Has  the  government  built  and  operated  railroads  successfully 
in  any  country?     Give  examples. 

3.  Do  you  think  the  United  States  government  should  own  the 
railroads  in  this  country  now?     Give  reasons. 

4.  Who  is  responsible  for  the  present  large  number  of  railroad 
accidents  —  the  railroad,  the  public,  or  the  employee?    Why? 

5.  Is  federal  control  superior  to  state  control  of  railroads?     Ex- 
plain fully. 

6.  What  causes  led  to  the  passage  of  the  Interstate  Commerce 
Law? 

7.  What  were  the  leading  advantages  of  the  law? 

8.  In  what  respects  was  the  law  ineffectual? 

9.  How  have  the  provisions  of  the  original  Act  of  1887  been 
strengthened  by  later  legislation? 

10.  Discuss  the  value  of  uniform  accounting. 

11.  What  is  pooling,  and  why  was  it  made  illegal? 

12.  Would  all  rates  be  reasonable  and  just  if  made  on  the  basis 
of  distance  only?    Explain  your  answer. 

13.  Has  the  Interstate  Commerce  Commission  power  to  fix  rates? 

14.  Give  the  arguments  for  and  against  government  ownership 
of  railroads. 

15.  To  what  extent  has  the  Federal  government  control  over  com- 
merce within  a  state  ? 

16.  Of  what  offense  was  the  old  Standard  Oil  Company   found 
guilty?    Why  was  this  extremely  anti-social? 

17.  On  what  basis  should  railroad  capitalization  be  determined? 

18.  What  are  the  limitations  of  government  control  over  "big 
business"? 


296  American  Economic  Life 

SUPPLEMENTARY  READING 

Ely,  R.  T.    Outlines  of  Economics,  Chap.  XXVII. 
Hammond,   M.   B.     Railway  Rate  Theories  of  the  Interstate  Com- 
merce Commission. 
Interstate  Commerce  Commission.     Annual  Reports. 
Johnson,  E.  R.,  and  Huebner,  G.  G.     Railway  Traffic  and  Rates. 
Merritt,  A.  N.     Federal  Regulation  of  Railway  Rates. 
Noyes,  W.  C.     American  Railroad  Rates,  Chap.  IV. 
Vrooman,  C.  S.     American  Railway  Problems. 
World's  Work.     April,  1920. 


CHAPTER  XXXI 
Efficiency  in  Production 

I.   Factors  of  production 

i .   The  factor  of  resources  : 

a.  America's  advantages 

b.  The  great  danger 

c.  The  law  of  diminishing  returns 

d.  The  effect  of  war 

e.  The  remedy 

2.  The  factor  of  labor : 

a.  Character  of  the  people 

b.  Labor's  rate  of  increase 

c.  Labor's  efficiency 

d.  Effects  of  war 

e.  The  outlook 

3.  The  factor  of  capital : 

a.  Its  early  abundance 

b.  Its  law  of  increase 

c.  Effect  of  war 

d.  The  solution 

4.  The  factor  of  management : 

a.  Its  modern  importance 

b.  Its  future  development 

II.   Kinds  of  societies 

1.  Retrogressive  societies 

2.  Static  societies 

3.  Dynamic  societies 

Having  examined  the  factors  at  work  and  the  typical 
fields  of  industrial  activity  in  the  production  of  wealth  in 
the  United  States,  it  is  well  to  summarize  now  the  condi- 

297 


298  American  Economic  Life 

tions  of  American  production  and  to  attempt  to  arrive  at 
some  conclusions  regarding  efficiency  in  American  economic 
life. 

Factors  of  Production.  —  So  far  as  the  bases  of  produc- 
tion are  concerned,  we  have  long  since  seen  that  the  funda- 
The  factor  mental  thesis  of  the  economist  is  that  all  pro- 
of resources:  duction  depends,  in  the  last  analysis,  upon  the 
harmonious  union  of  the  requisites  of  productive  enterprise, 
that  is,  upon  the  successful  utilization  of  the  land,  labor, 
and  capital  resources  of  society.  We  have  further  seen 
that,  in  the  period  following  the  Civil  War,  the  organiza- 
tion of  industry  in  the  United  States  attained  such  perfected 
development  as  to  render  the  element  of  managing  ability 
a  vital  factor  in  all  the  more  complicated  industrial  wealth- 
producing  activities  of  the  American  people.  Although 
this  last  element  depends  upon  some  form  of  combination 
of  the  more  fundamental  factors  of  production,  its  separate 
treatment,  in  the  more  advanced  stages  of  national  eco- 
nomic development,  is  necessary  to  a  complete  compre- 
hension of  the  productive  process.  Just  as  managing 
ability  and,  before  that,  capital  were  the  latest  productive 
elements  to  appear  in  industrial  society,  so  natural  resources 
and  labor  were  the  primary  and  original  factors  of  early 
production.  These  two  are  co-equal  in  importance;  for, 
without  each,  no  creation  of  economic  utilities  is  possible. 
From  the  standpoint  of  production,  national  prosperity 
is  dependent  upon  the  existence  of  those  natural  resources 
summed  up  in  the  word  "  land,"  and  upon  the  application 
to  this  land  of  an  intelligent  and  adequate  supply  of  labor. 
What  conclusions,  then,  may  we  draw,  in  these  respects, 
regarding  the  possibilities  of  continued  national  prosperity 
in  the  United  States? 


Efficiency  in  Production  299 

America's  advantage  in  the  field  of  natural  resources  is 
well  known.  To  realize  again  the  significance  of  this 
truism,  we  have  but  to  recall  the  great  extent  America's 
and  variety  of  soil  and  climate  enjoyed  by  the  advanta&s- 
United  States,  the  rich  mineral  deposits  of  the  land,  the 
forest  areas  still  preserved,  the  possibilities  of  its  water 
resources,  together  with  the  great  system  of  waterways, 
harbors,  and  coastal  advantages  inherent  in  the  land. 
Because  of  these  tremendous  advantages,  the  United 
States  has  been  able,  in  the  course  of  half  a  century,  to 
leap  to  the  forefront  of  nations  in  the  production  of  coal, 
iron,  steel,  and  other  raw  materials  of  industry,  as  well  as 
in  the  annual  output  of  corn,  wheat,  cotton,  lumber,  and 
other  agricultural  products.  The  very  youth  and  power 
of  the  land  have  redounded,  not  only  to  the  credit  of  the 
nation,  but  to  that  of  the  entire  civilized  world. 

But  nations,  like  youths,  cannot  glory  forever  in  an 
inexhaustible  fund  of  natural  energy.  Since  the  found- 
ing of  the  nation,  the  resources  of  the  country  The  great 
have  been  steadily  utilized.  Over  one-half  of  dan&er- 
the  land  originally  belonging  to  the  Federal  government 
has  been  practically  given  away  to  individuals  and  cor- 
porations for  development.  These  public  lands  have 
been  granted  for  the  endowment  of  free  schools,  for  the 
use  of  railroads  and  other  internal  improvements,  and  for 
homesteads  for  the  support  of  the  landless.  The  amount 
of  "  free  land,"  therefore,  in  America  is  steadily  declining; 
and,  of  course,  much  of  the  land  which  remains  is  inferior 
in  productive  capacity  to  that  which  has  been  utilized. 
We  must  exclude  from  this  category,  however,  many  lands 
rich  in  natural  resources  which  are  still  unappropriated, 
notably  the  368,000,000  acres  of  unappropriated  public 


300  American  Economic  Life 

land  in  Alaska.  Aside  from  these  Alaskan  lands,  there 
were,  in  1909,  363,300,000  acres  of  unreserved  and  unappro- 
priated lands  belonging  to  the  United  States  government ; 
while  571,600,000  acres  had  been  turned  over  to  individuals 
and  corporations,  153,500,000  acres  had  been  granted  to 
the  states,  and  324,500,000  acres  had  been  reserved  for 
forests,  parks,  and  other  public  purposes.  Up  to  that 
time,  the  United  States  had  been  disposing  of  its  public 
lands  —  exclusive  of  those  in  Alaska  —  at  the  rate  of  about 
fifteen  million  acres  a  year.  Just  how  long  the  remaining 
public  lands  of  the  United  States  will  hold  out  is,  therefore, 
a  matter  of  grave  concern. 

It  will  readily  be  seen  that  this  gradual  exhaustion  of 
public  lands  may  have  a  marked  effect  upon  the  future 
Law  of  welfare  and  prosperity  of  the  nation.  In  fact, 
diminishing    some  writers  have  already  attributed  the  exist- 

TPtlLTftS 

ence  of  poverty  in  the  United  States  to  this  pri- 
vate appropriation  of  public  lands.  Furthermore,  we  have 
seen  that  land  itself,  after  a  certain  point  has  been  reached 
in  its  cultivation,  tends  to  yield  a  diminishing  return. 
That  is  to  say,  land  tends  finally  to  yield  a  smaller  relative 
return  in  proportion  to  the  increased  amounts  of  labor 
and  capital  applied  to  it.  Has  this  point  been  reached  in 
the  cultivation  of  land  in  the  United  States?  Certainly, 
in  some  respects,  there  is  considerable  room  for  speculation 
on  this  question.  However,  if  we  consider  the  natural 
resources  of  the  United  States  as  a  whole,  and  the  ingenuity 
and  inventive  genius  of  the  people  in  combating  land's 
diminishing  tendency,  we  may  venture  to  assert  that  many 
years  will  elapse  before  this  law  grips  all  returns  from 
natural  agents.  On  the  other  hand,  there  seems  to  be 
recurring  indications  of  the  operation  of  this  law  in  par- 


Efficiency  in  Production  301 

ticular  directions.  For  example,  the  increased  cost  of  pro- 
duction of  coal  and  oil  and  the  general  rise  in  prices  follow- 
ing the  World  War  in  the  United  States  have  been  ac- 
counted for  in  part  on  this  basis.  However,  it  is  impossible 
to  arrive  at  any  definite  and  accurate  conclusion  in  this 
regard,  because  such  varying  estimates  have  been  given 
respecting  the  available  supply  of  our  natural  resources. 
For  example,  although  many  people  have  been  accustomed 
to  think  of  our  available  coal  supply  as  lasting  only  another 
hundred  years,  an  estimate  of  the  United  States  Bureau 
of  Mines  in  1920  placed  the  supply  of  minable  coal  in  the 
United  States  at  3,553,637,100,000  tons,  or  enough  to  last 
at  the  present  rate  of  consumption  for  7000  years. 

Of  more  direct  bearing  upon  the  question  of  America's 
natural  resources  is  the  effect  of  war.  The  World  War 
forced  the  productive  process  in  the  United  Ejjectof 
States  to  its  utmost  limit.  Never  before,  in  the  war- 
same  length  of  time,  had  its  volume  of  production  in  agri- 
cultural products  and  in  certain  raw  materials  of  industry 
been  so  great.  In  many  respects  the  nation  was  forced 
not  only  to  support  itself,  but  to  feed  and  supply  a  large 
proportion  of  European  peoples.  All  temporary  consider- 
ations of  possible  future  needs  were  thrown  to  the  winds. 
Whatever  the  immediate  cost  in  natural  resources  the  war 
had  to  be  won.  As  a  result,  the  nation  suffered,  at  the 
close  of  the  war,  from  a  partial  exhaustion  of  natural 
resources.  Millions  of  dollars'  worth  of  agricultural  prod- 
ucts and  of  mineral  wealth  had  been  sacrificed  on  the  altar 
of  Mars.  The  reaction  of  war  was  found  in  diminished 
natural  resources. 

There  is  only  one  remedy  for  the  ravishing  of  natural 
wealth.     This  is  found  in  a  return  to  the  ideals  of  conserva- 


3<02  American  Economic  Life 

tion.  The  waste  of  war  must  be  replaced  by  the  wise  use 
of  our  remaining  resources.  The  perpetuation  of  the  demo- 
te cratic  ideal,  as  against  the  menace  of  autocracy, 
remedy.  has  been  WOrth  a  thousand  times  more  than  the 
destruction  of  the  natural  wealth  necessary  for  its  con- 
tinued realization.  But  the  problem  of  the  twentieth 
century  is  to  guide  production  along  the  lines  of  the  care- 
ful utilization  of  America's  remaining  natural  resources. 
Through  scientific  farming,  irrigation,  and  reclamation,  the 
soil  must  continue  to  yield  an  increasing  return ;  through 
the  utmost  care  and  the  complete  elimination  of  waste,  the 
mineral  resources  must  be  husbanded  for  future  genera- 
tions; through  the  utilization  of  new  forms  of  power, 
the  diminution  of  coal  and  oil  resources  must  be  offset; 
and,  through  wise  governmental  action,  land  monopoly 
must  be  checked,  and  a  far-seeing  policy  formulated  for  the 
future  control  and  development  of  America's  remaining 
natural  resources. 

Of  equally  vital  importance  to  individual  welfare  and 
social  prosperity  is  the  labor  supply  of  a  nation.  Natural 
ia    „  .  resources  are  useless  without  an  adequate  and 

The  labor  H 

factor:  efficient  labor  force.     From  our  review  of  the 

Character  of  process  of  production  in  the  United  States,  what 
conclusions  may  we  draw  with  regard  to  the 
character,  amount,  and  efficiency  of  American  labor? 
From  our  examination  .of  the  population  of  the  United 
States,  we  have  seen  that  it  developed  from  a  small  and 
comparatively  homogeneous,  compact  group  of  three  million 
people  in  the  eighteenth  century  to  an  immense,  hetero- 
geneous, and  diverse  mass  of  over  one  hundred  millions 
in  the  twentieth  century.  The  present  composite  character 
of  the  American  people  is  largely  due  to  the  European 


Efficiency  in  Production  303 

immigration  of  the  past  fifty  years.  The  early  character 
of  the  people  was  that  which  naturally  results  from  the 
life  of  the  frontier  —  rugged,  individualistic,  and  adaptable. 
As  the  frontier  gradually  disappeared  from  American  life, 
the  people  became  more  careless,  generous,  and  wasteful. 
They  exploited  the  natural  resources  of  the  country,  but 
retained  their  boundless  spirit,  energy,  and  initiative. 

America's  development  has  not  lagged  for  want  of  labor- 
ers. This  increase  in  population  has  sometimes  been  due 
as  much  to  immigration  as  to  the  natural  in-  Labor's  rate 
crease  in  birth  rate.  In  fact  we  have  seen  °ftnc^eas^ 
that,  during  the  later  nineteenth  century,  the  native  white 
birth  rate  gradually  declined,  and  that  this  decline  was 
partially  offset  by  the  great  number  of  foreign  elements 
coming  into  the  United  States.  Furthermore,  this  increase 
in  the  sum  total  of  population  has  not  been  attended,  as 
Malthus  had  predicted,  by  widespread  poverty.  In  other 
words,  population  has  not  outstripped  the  means  of  sub- 
sistence. While  poverty  has  existed,  the  early  resources 
of  the  country  were  so  abundant  that  the  land  furnished 
general  opportunity  for  the  increased  millions  to  earn  their 
livelihood.  Labor's  rate  of  increase  was  not  greater  than 
the  return  from  the  land.  Throughout  the  nineteenth 
century  the  supply  of  labor  was  sufficient  to  develop  the 
land,  and  the  land,  in  return,  was  sufficient  to  support  the 
increased  population. 

But  since  millions  of  this  increased  labor  supply  were 
made  up  of  blacks  and  immigrants,  the  native  white  stock 
has  been  partially  weakened.     Hence,  while  the  Labor's 
American  labor  force  has  steadily  increased  in  efficiency- 
quantity,  it  has  somewhat  declined  in  uniform  quality. 
This  fact  has  had  a  slight  effect  upon  the  efficiency  of  labor. 


304  American  Economic  Life 

While,  in  many  respects,  certain  groups  of  American  labor 
are,  to-day,  more  efficient  than  ever,  there  are  numerous 
instances  of  lowered  efficiency  in  our  labor  force.  This  is 
probably  due  to  the  injection  into  American  life  of  lower 
European  standards,  and  of  ideas  and  habits  of  thought 
which  are  entirely  out  of  harmony  with  American  institu- 
tions. We  are  apt,  however,  to  exaggerate  the  importance 
of  this  element,  because  we  have  been  so  accustomed  to 
regard  American  labor  as  representing  the  climax  of  indus- 
trial efficiency. 

The  World  War  also  accentuated  the  shortcomings  of 
labor.  From  the  normal,  daily  grooves  of  ordinary  eco- 
Efects  of  nomic  life,  the  American  people  were  suddenly 
war-  thrust  into  the  abnormal  pursuits  of  war.     As  a 

result,  the  entire  industrial  system  became  temporarily 
dislocated.  The  aftermath  of  war  was  felt  in  a  series  of 
abnormal  conditions.  The  entrepreneur  made  enormous 
profits  through  the  sharp  rise  in  prices,  and  the  laborer 
received  a  corresponding  increase  in  wages.  For  the  first 
time,  many  laborers  began  to  realize  the  full  economic 
importance  of  their  position  and  to  make  persistent  demands 
for  further  wage  increases.  With  the  aid  of  higher  wages, 
labor  often  withdrew  temporarily  from  production.  This 
situation  naturally  resulted  in  underproduction  and  in 
still  higher  prices.  At  the  same  time,  labor  became  extrava- 
gant in  its  consumption  of  goods,  without  enlarging  the 
volume  of  production.  The  labor  shortage  became  acute, 
particularly  in  agriculture,  which  suffered  greatly  as  a 
result  of  the  shifting  of  former  agricultural  labor  to  the 
cities  after  the  process  of  demobilization  had  been  com- 
pleted. 

But  labor  unrest,  at  its  worst,  is  only  a  temporary  phe- 


Efficiency  in  Production  305 

nomenon  in  American  life.  Idleness,  extravagance,  and 
labor  disorders  are  not  permanent  characteristics  of 
Anglo-Saxon  peoples.  Their  method  is  one  of  The 
compromise  and  adjustment.  The  task  before  outlook- 
the  American  people  is  to  educate  the  newer  element  in 
the  population  to  the  point  of  view  possessed  by  the  origi- 
nal stocks.  When  this  is  accomplished,  there  need  be 
no  fear  of  revolutionary  European  doctrines  contaminating 
American  life  through  the  foreign-born  population.  Such 
labor  radicals  as  preach  the  doctrine  of  direct  action,  sabot- 
age, and  confiscation  of  capital  have  no  place  in  American 
civilization.  They  may  thrive  in  the  sickly  soil  of  op- 
pressed Europe,  but  wither  when  transplanted  to  the  pros- 
perous land  of  America.  As  compared  with  foreign  coun- 
tries, therefore,  the  United  States  has,  on  the  whole,  a 
splendid  asset  in  its  laboring  population,  which  is  not  only 
increasing  in  number,  but  inherently  capable,  through 
proper  guidance,  of  attaining  the  highest  industrial  effi- 
ciency. 

If  the  gospel  of  work  and  conservation  is  unceasingly 
practiced  in  the  United  States,  this  nation,  so  far  as  the 
primary  factors  of  production  —  land  and  labor 
—  are  concerned,  will  be  able  to  realize  the  ideals  of  capital: 
of    individual    prosperity    and    social    welfare,   its  early 

.      .  .    abundance. 

Because  of  the  past  reckless  appropriation  of 
natural  resources  and  the  later  acquisition  of  unassimilated 
labor  elements  in  the  population,  the  future  prosperity  of 
America  may  not  be  so  easily  attainable  as  that  of  pioneer 
days ;  but  this  fact  does  not  mean  that  future  generations 
of  Americans  will  be  denied  national  prosperity.  It  only 
means  that  the  United  States,  in  a  sense,  stands  at  the 
parting  of  the  ways,  —  that  waste  must  be  replaced  by 


306  American  Economic  Life 

conservation,  that  labor  unrest  must  be  succeeded  by  in- 
dustrial stability.  So,  too,  with  regard  to  the  capital 
resources  of  America.  This  factor  has  been  abundant  in 
the  past,  and,  through  the  elimination  of  extravagant 
spending  and  a  normal  increase  in  production,  capital  will 
continue  to  be  more  than  sufficient  to  meet  the  require- 
ments of  future  production.  We  have  seen  that,  through- 
out the  nineteenth  century,  the  increase  in  capital  —  both 
in  capital  goods  and  capital  value  —  was  one  of  the  strik- 
ing characteristics  of  American  civilization.  So  abundant 
was  this  supply  of  capital  that  it  existed  in  all  kinds  of  sur- 
plus wealth  —  factories,  locomotives,  ships,  raw  materials 
of  industry,  and  countless  other  goods  used  to  assist  in  fu- 
ture production. 

Since  capital  is  the  result  of  the  application  of  labor  to 
land,  it  is  more  easily  replaced,  when  once  destroyed,  than 
its  law  of  is  either  of  the  primary  requisites  of  production. 
increase.  «  Capital  is  an  intermediate  product  of  nature 
and  labor,  nothing  more.  Its  own  origin,  its  existence, 
its  subsequent  action,  are  nothing  but  stages  in  the  con- 
tinuous working  of  the  true  elements,  nature  and  labor." 
The  ability  to  increase  capital  is,  therefore,  not  beset  by 
any  intrinsic  difficulties.  Its  law  of  increase  depends,  when 
once  it  is  produced,  upon  the  amount  of  wealth  which  can 
be  saved  and  upon  the  disposition  to  save.  Without  ade- 
quate and  efficient  production,  there  can  be  no  surplus  of 
production  over  consumption  to  furnish  the  starting  point 
for  the  accumulation  of  capital.  When  extravagant  con- 
sumption outruns  production,  or  when  underproduction 
results  through  inefficient  or  inadequate  labor  resources, 
no  fund  for  capital  development  is  possible.  Hence  the 
first  requisite  for  the  increase  of  capital  is  efficient  produc- 


Efficiency  in  Production  307 

tion.  When  a  surplus  is  once  assured,  the  capital  increase 
depends  (1)  upon  the  amount  of  this  surplus,  that  is,  the 
actual  amount  which  can  be  saved  without  lowering  the 
normal  standard  of  living ;  and  (2)  the  disposition  to  save 
on  the  part  of  the  producer.  Throughout  the  nineteenth 
century,  both  these  requirements  were  capable  of  fulfill- 
ment by  the  American  people. 

It  is  interesting  to  note  the  effect  of  war  upon  the  develop- 
ment of  capital.  The  very  essence  of  war  is  the  destruction 
of  economic  utilities.  Every  one  is  familiar  with  E^ect  0j 
the  fact  that  billions  of  dollars  of  European  war- 
wealth  were  destroyed  by  the  World  War.  The  resulting 
shrinkage  of  European  capital  was  perhaps  unparalleled 
in  human  history.  How  did  this  cataclysm  affect  American 
capital?  Its  effect  was  two-sided.  In  the  first  place, 
billions  of  dollars  of  goods  were  sent  to  Europe  to  be  de- 
stroyed in  the  great  conflict.  This  wealth  was  not  being 
used  to  produce  more  wealth,  but  was  being  immediately 
consumed.  Had  a  similar  amount  of  wealth  been  produced 
and  not  later  destroyed,  the  capital  fund  of  the  world  would 
have  been  enormously  enlarged  during  that  period.  While 
the  war  was  in  progress,  however,  the  true  situation  was 
temporarily  obscured,  because  the  war's  immediate  effect 
was  not  felt  on  account  of  the  great  reserves  of  production 
in  the  United  States.  Furthermore  some  of  the  goods 
produced  during  that  period  in  this  country,  such  as  ships, 
were  not  actually  destroyed,  but  really  served  to  increase 
the  fund  of  capital.  In  the  second  place,  the  ultimate 
effect  of  the  World  War  upon  our  capital  supply  was  not 
immediately  perceived,  because  the  volume  of  money  in 
the  United  States  rapidly  increased  during  that  period. 
This  increase  was  due  (1)  to  the  influx  of  European  gold 


308  American  Economic  Life 

in  payment  of  American  goods  shipped  abroad,  and  (2) 
to  the  inflation  of  American  currency  through  the  expansion 
of  credit  and  the  issuance  of  Federal  Reserve  notes.  Of 
course,  this  inflation  of  currency  and  underproduction  of 
capital  goods  was  accompanied  by  the  phenomenon  of  high 
wages  and  still  higher  prices.  So  great  was  the  increase 
in  the  volume  of  money  that  savings  bank  deposits,  in  191 8, 
reached  a  sum  total  of  nearly  five  and  one-half  billions  of 
dollars.  The  total  capital  accumulations  of  the  United 
States  in  that  year  were  estimated  at  nearly  $22,000,000,000 
by  Professor  David  Friday,  who  further  stated  that  "  in 
1 91 8  approximately  thirty  per  cent  of  our  national  income 
was  saved." 

The  World  War,  however,  served  to  bring  out  the  dis- 
tinction between  money  and  goods.  In  1920,  there  were 
The  m  the  United  States   $4,000,000,000  in  paper 

solution.  money,  or  three  times  that  of  the  pre-war  period ; 
and  of  this  amount  almost  $3,000,000,000  were  in  Federal 
Reserve  notes.  At  the  same  time  the  war  disorganized 
many  of  the  normal  and  regular  channels  of  American 
production.  But  it  is  an  economic  law  that  a  nation,  in 
order  to  enjoy  industrial  stability,  must  maintain  a  proper 
relation  between  the  volume  of  currency  and  the  volume 
of  production.  Mere  abundance  of  money  means  nothing, 
while  shortage  of  essential  goods  means  everything,  to  the 
prosperity  of  a  nation.  Under  such  circumstances,  it  is 
necessary  to  reestablish  economic  equilibrium.  Through 
the  gradual  contraction  of  credit  and  the  retirement  of 
government  notes,  inflation  ceases  and  speculation  is  curbed. 
At  the  same  time  the  fund  from  which  capital  is  actually 
drawn  becomes  enlarged  by  increased  production,  and  by 
the  practice  of  thrift,  instead  of  extravagance,  in  the  con- 


Efficiency  in  Production  309 

sumption  of  goods.     The  real  basis  of  capital  is  not  money 
and  credit,  but  goods  and  material  values. 

Another  element  to  be  considered  in  measuring  efficiency 
in  production  is  the  question  of  business  organization  or 
management  of  industry.  The  three  factors  of  The  factor 
production  must  be  scientifically  mobilized  for  ^^age' 
purposes  of  production.  In  modern  industrial  ns  modern 
society  two  or  three  of  the  factors  are  often  ™P°'iance- 
under  the  control  of  one  management.  For  example,  in 
large  scale  production  the  owners  of  the  capital  are  often 
the  owners  of  the  land.  To  this  combined  control  of  land 
and  capital  there  is  then  added  the  management  of  the 
labor  force  required  in  the  process  of  production.  We 
have  seen  that  the  commander  of  these  industrial  forces 
has  been  described  as  organizer,  entrepreneur,  or  captain 
of  industry.  In  America,  the  development  of  managing 
ability  has  become  so  important  and  striking  that  the 
entrepreneur  is  entitled  to  separate  consideration  as  a 
factor  of  production.  Upon  this  element  the  success  or 
failure  of  the  enterprise  often  depends.  More  than  this, 
the  investments  of  millions  of  stockholders  are  dependent 
upon  the  sound  judgment  and  business  management  of 
the  entrepreneurs.  It  is  this  factor  that  is  largely  respon- 
sible  for  the  development  of  the  great  American  trusts  which 
have  characterized  and  assured  the  industrial  supremacy 
of  the  United  States. 

Consequently,  the  future  development  of  business  or- 
ganization is  of  the  greatest  importance  to  American  so- 
ciety. Is  the  future  management  and  organiza-  Its  juture 
tion  of  American  industry  likely  to  be  beneficial  development. 
or  detrimental  to  the  welfare  of  the  American  people  ?  The 
answer  to  this  question  will  depend  upon  our  ability  to 


310  American  Economic  Life 

develop  individual  initiative  in  harmony  with  the  public 
good.  The  experience  of  the  railroads  under  government 
operation  seems  to  point  to  the  fact  that  American  business 
enterprises  thrive  more  successfully  under  the  influence  of 
private  management  and  individual  initiative.  In  our 
present  stage  of  political  development,  industry  does  not 
seem  to  be  so  well  organized  and  managed  when  directly 
operated  by  governmental  authorities.  The  most  effective 
management  of  industry  seems  to  be  linked  with  motives 
of  personal  gain  and  individual  interests.  But  this  fact 
of  human  nature  does  not  mean  that  private  gain  is  to  be 
the  sole  or  even  the  chief  end  of  cooperative  enterprise. 
On  the  contrary,  the  public  must  be  protected  from  the 
unrestrained  exercise  of  individual  power,  when  that  power 
comes  into  conflict  with  the  good  of  the  community.  The 
monopoly  power  of  individual  or  corporate  management 
must  be  checked  in  the  interest  of  the  public  good. 
Through  some  form  of  social  control,  —  through  govern- 
ment regulation,  —  the  element  of  management  in  pro- 
duction must  be  so  directed  that  the  interests  of  the  pub- 
lic will  be  safeguarded  without  impairing  the  efficiency 
of  industrial  organization. 

Kinds  of  Societies.  —  We  have  now  concluded  the  dis- 
cussion of  some  of  the  more  important  problems  arising 
Retro-  fr°m    tne   production   of   wealth.     Since   land, 

gressive  labor,  and  capital  are  all  necessary  to  pro- 
duction, the  wealth-producing  machinery  of 
society  will  depend  upon  the  efficiency  of  each.  The 
greater  the  productive  capacity  of  each  requisite,  the 
greater  will  be  the  possibilities  of  national  prosperity. 
From  this  point  of  view,  therefore,  one  of  three  things 
may  happen  in  social  evolution.    In  the  first  place,  it  may 


Efficiency  in  Production  311 

happen  in  an  old  civilization  that  population  is  increasing 
while  the  other  factors  of  production  —  land  and  capital  — 
are  decreasing.  Through  loss  of  land  or  through  soil  ex- 
haustion, natural  resources  may  be  depleted ;  while,  through 
extravagance,  ignorance,  or  inefficiency  in  labor,  surplus 
wealth  may  be  destroyed  and  the  capital  supply  of  the  na- 
tion exhausted.  As  a  consequence,  the  production  of  wealth 
gradually  decreases,  and  when  this  condition  becomes 
general  throughout  the  nation,  the  society  becomes  retro- 
gressive. The  path  of  history  has  been  strewn  with  such 
decaying  civilizations. 

In  the  second  place,  a  society  may  be  stationary.  For 
centuries,  perhaps,  the  methods  of  utilizing  natural  resources 
and  of  developing  capital  may  have  remained  static 
practically  unaltered,  while  the  population  may  societies- 
have  increased  in  numbers,  but  not  in  efficiency.  When 
this  situation  exists,  it  is  impossible  to  satisfy  the  higher 
wants  of  an  advancing  civilization,  because  the  volume  of 
production  remains  proportionally  the  same  throughout 
the  passing  of  the  centuries.  The  weight  of  custom  and 
tradition  prevents  the  development  of  efficient  methods 
of  production,  and  thereby  obstructs  the  forward,  progres- 
sive movement  of  society.  For  centuries,  China  has  been 
a  classic  illustration  of  a  static  society.  It  is  possible,  how- 
ever, that  the  twentieth  century  may  see  China  freed  from 
enslaving  tradition,  and,  thereby,  place  this  ancient  civiliza- 
tion in  the  commanding  position  warranted  by  its  natural 
resources. 

Still  another  possibility  is  open  to  society.  A  civiliza- 
tion endowed  with  rich  natural  resources,  an  efficient  and 
adequate  labor  force,  and  an  abundance  of  ever  increasing 
capital  may  progress  rapidly  in  the  production  of  material 


312  American  Economic  Life 

wealth.  Because  of  the  efficiency  of  the  factors  of  produc- 
tion, the  wealth  of  the  community  may  be  constantly  in- 
Dynamic  creasing.  In  this  manner,  the  higher  wants  of 
societies.  man  may  continue  to  expand,  and  their  satisfac- 
tion will  be  assured  by  the  increased  production.  Such 
a  dynamic  civilization  presents  infinite  possibilities  for 
individual  prosperity  and  social  welfare.  Our  study  of 
production  in  the  United  States  shows  conclusively  the 
dynamic,  progressive  character  of  American  society. 

QUESTIONS   FOR   RECITATION 

i.   Why  is  it  important  to  emphasize  efficiency  in  production? 

2.  Contrast  the  importance  of  the  primary  with  the  secondary 
factors  of  production.     Give  examples. 

3.  Contrast  the  natural  resources  of  the  United  States  with  those 
of  England ;  with  those  of  Spain ;  with  those  of  -Russia ;  with  those 
of  Italy. 

4.  In  which  of  these  countries,  and  in  what  occupations,  is  the 
law  of  diminishing  returns  operating  ?     Give  reason  in  each  case. 

5.  Of  what  national  policy  is  the  United  States  feeling  the  effects 
to-day  ?     State  the  advantages  and  disadvantages  of  this  policy. 

6.  Give  some  idea  of  the  amount  of  unappropriated  public  lands 
in  the  United  States ;  of  the  amount  appropriated ;  of  the  amount 
reserved.  Where  are  the  present  unappropriated  lands  chiefly 
found  ? 

7.  How  do  you  account  for  the  shrinking  of  our  natural  resources  ? 
Explain  the  effect  of  the  World  War  upon  them.  What  is  the 
remedy  ? 

8.  Contrast  the  early  character  with  the  later  character  of  the 
American  people.     How  do  you  account  for  the  change  ? 

9.  Is  the  United  States  likely  to  suffer  from  a  permanent  short- 
age of  labor  ?    What  makes  you  think  so  ? 

10.  Discuss  the  efficiency  of  American  labor. 

11.  Explain  clearly  the  effects  of  the  World  War  upon  labor, 
both  in  this  country  and  abroad. 


Efficiency  in  Production  313 

12.  What  is  the  best  method  of  curing  labor  troubles  in  the  United 
States?    Why? 

13.  Why  has  capital  been  abundant  in  the  United  States  ?  What 
will  its  future  increase  depend  upon  ?    Is  it  likely  to  increase  ? 

14.  Why  is  it  necessary  to  emphasize  production  on  the  one  hand, 
and  thrift  on  the  other  hand  ? 

15.  Discuss  the  effects  of  the  World  War  upon  the  supply  of 
capital :   (1)  in  Europe,  (2)  in  the  United  States. 

16.  Was  the  capital  increase  during  this  period  mostly  in  capital 
goods  or  in  capital  value  (money)?  Why?  What  was  the  effect 
of  this  ? 

17.  What  dangers  result  from  inflation?  How  may  inflation  be 
remedied  ? 

18.  Discuss  the  importance  of  business  management  as  a  factor 
of  production.     Show  its  origin. 

19.  Upon  what  will  its  future  value  depend?  Is  it  likely  to  in- 
crease or  decrease  in  importance?    Why? 

20.  Define  three  kinds  of  societies,  showing  in  each  case  the 
interrelation  of  the  factors  of  production. 

PROBLEMS   FOR  DISCUSSION 

1.  Mc.y  production,  as  well  as  consumption,  be  a  measure  of 
welfare  ?    How  ?    Which  is  the  better  measure  ?    Why  ? 

2.  When  production  is  great  enough  to  insure  national  pros- 
perity, does  individual  welfare  necessarily  follow? 

3.  Explain  how  individual  prosperity  is  affected  by  the  manner 
in  which  wealth  is  distributed  throughout  society.     Give  examples. 

4.  Name  a  country  in  which  great  production  and  glaring  in- 
stances of  poverty  are  found.     Account  for  this  situation. 

5.  Cite  a  nation  in  which  there  is  great  production  and  general 
prosperity.     State  the  reasons  for  this. 

6.  Give  examples  of  retrogressive  and  static  societies.     Show 
why  in  each  case. 

7.  What  is  a  dynamic  society  ?     Give  an  illustration  from  Europe 
and  explain  clearly. 

8.  How  would  you  classify  Japan?     India?    Why? 

9.  Did  Malthus  believe  in  the  continued  existence  of  dynamic 
societies  ?    Why  not  ? 


314  American  Economic  Life 

10.^  What  theories  handicapped  the  classical  school  of  economists 
in  their  views  regarding  dynamic  societies  ?     How  ? 

ii.  From  the  standpoint  of  production,  discuss  the  future  possi- 
bilities of  American  civilization. 


SUPPLEMENTARY  READING 

Annals  of  American  Academy  of  Political  and  Social  Science,  January, 

IQIQ. 

Carver,  T.  N.     Principles  of  Political  Economy,  Chap.  XV. 

Clay,  H.    Economics,  Chaps.  Ill,  V. 

Ely,  R.  T.     Outlines  of  Economics,  Chap.  IX. 

Mill,  J.  S.    Principles  of  Political  Economy,  Chaps.  VI-X. 

Parlin,  C.  C.     Basic  Facts  of  Prosperity  (1920). 

Patten,  S.  N.     Dynamic  Economics. 

Seager,  H.  R.     Introduction  to  Economics,  Chap.  VIII. 

Taylor,  F.  W.     Principles  of  Scientific  Management. 


PART   FOUR 
PROBLEMS   OF  EXCHANGE 

CHAPTER  XXXII 

Value  and  Price 

I.  Value 

i.   Meaning  of  exchange 

2.  Nature  of  value  : 

a.  Its  popular  meaning 

b.  Requisites  of  economic  value : 
(i)  It  arises  from  utility 

(2)  It  involves  scarcity 

c.  Relation  between  value  and  wealth 

d.  Relation  between  utility  and  usefulness 

3.  Forms  of  economic  value  : 

a.  Value  in  use : 

(1)  Meaning 

(2)  Examples 

b.  Value  in  exchange : 

(1)  Meaning 

(2)  How  determined 

(3)  An  illustration 

II.   Price 

1.  What  price  is 

2.  How  price  is  determined  : 

a.  When  competition  is  free 

b.  When  competition  is  not  free 

3.  The  conclusion 

31s 


316  American  Economic  Life 

Value.  —  Leaving  now  the  subject  of  the  production  of 
wealth,  we  pass  on  to  a  consideration  of  some  of  the  more 
Meaning  important  problems  connected  with  its  exchange, 
of  Wealth  would  be  of  little  value  if,  after  it  had 

been  produced,  it  were  not  transferred  from 
one  individual  to  another.  It  will  readily  be  seen  that 
the  complex  conditions  of  modern  industrial  life,  due  to 
separation  of  employments  and  division  of  labor,  make  it 
impossible  for  one  man  to  produce  all  the  economic  goods 
that  he  requires  for  his  own  consumption.  The  process 
by  which  he  secures  goods  from  others  in  return  for  his 
own  goods  is  known,  in  economics,  as  the  exchange  of 
wealth.  In  advanced  civilizations  the  welfare  of  indi- 
viduals and  of  society  is  clearly  dependent  upon  this  pro- 
cess of  exchange. 

Goods  would  not  be  desired  and  exchanged  for  one  an- 
other unless  they  possessed  value.  In  a  popular  sense, 
its  nature:  the  term  "  value  "  is  given  a  wide  application. 
Popular  We  speak  of  the  value  of  an  individual  to  a 
meaning.  community,  or  of  the  value  of  an  educational  or 
of  a  religious  system  to  society.  In  this  sense,  the  term 
refers  to  the  desirable  qualities  in  the  person  or  institution. 
Consequently  we  think  of  "  personal  values,"  "  educational 
values,"  and  "  religious  values  "  —  each  one  of  these 
phrases  illustrating  the  general  meaning  of  the  term  value 
as  used  in  everyday  life. 

In  economics,  however,  the  term  value  has  a  special 
significance  which  arises  primarily  from  the  utility  of  goods. 
Re  uisites  ^  w*^  ^e  remembered  that  "  wants  "  are  the 
of  economic  desires  which  individuals  have  for  goods,  and 
that  "  utility  "  is  the  name  given  to  the  want- 
satisfying  quality  in  the  good.     The  presence  of  utility 


Value  and  Price  317 

is  the  first  requisite  of  economic  value.  Wheat,  books, 
steel  rails,  petroleum  —  all  possess .  utility  because  each 
satisfies  some  particular  individual  want.  Furthermore,  all 
these  goods  are  limited  in  extent. 

But  not  all  goods  are  so  limited ;  some  are  free.  Occa- 
sionally goods  are  so  plentiful  that,  although  they  have 
utility,  they  do  not  possess  value  in  the  economic  sense. 
For  example,  water,  a  free  gift  of  nature,  may  or  may  not 
have  economic  value.  Frequently  it  has  not  because  it  is 
not  an  economic  good,  —  no  one  would  give  something 
upon  which  he  had  spent  time  and  effort  in  exchange  for 
it.  But  to  a  man  adrift  on  the  South  Pacific  the  value  of 
drinking  water  would  be  inestimable,  —  he  would  give  any- 
thing in  exchange  for  it.  Thus,  in  addition  to  utility, 
scarcity  is  necessary  to  economic  value. 

This  analysis  of  value  makes  clear  the  relation  between 
economic  value  and  material  wealth.     It  will  be  recalled 
that  wealth,  i.e.  economic  goods,  must  possess 
three  characteristics.     In  the  first  place,  utility  between 
is  essential  to  material  wealth  ;  it  is  also  essential  valufand 

wealth. 

to  economic  value.  Secondly,  wealth  involves 
the  element  of  industrial  effort,  that  is,  labor.  This  char- 
acteristic of  wealth  is  synonymous  with  the  element  of 
scarcity  in  economic  value ;  for  only  free  gifts  of  nature, 
like  air,  are  boundless  in  extent,  and  their  existence  in- 
volves no  expenditure  of  labor  or  industrial  effort.  In  other 
words,  goods  are  scarce  because  industrial  effort,  or  labor, 
is  necessary  to  their  production.  Finally,  material  wealth 
possesses  the  quality  of  exchangeability,  which,  of  course, 
is  the  very  measurement  of  economic  value.  Since  things 
which  are  equal  to  the  same  thing  are  equal  to  each  other, 
we  find  that  material  wealth  is  equivalent  to  economic 


318  American  Economic  Life 

value.  Hence,  economic  goods  and  economic  value  are 
synonymous  in  meaning. 

It  has  already  been  pointed  out,  however,  that  utility 
is  not  synonymous  with  usefulness.  Utility  is  simply  the 
utility  and  quality  in  a  good  which  satisfies  a  want.  Now, 
usefulness,  if  an  individual  wants  something  that  is  not 
useful,  this  useless,  or  even  harmful,  thing  will  possess 
utility.  A  diamond  necklace  or  a  box  of  cigars  may,  there- 
fore, possess  as  much  utility,  and  consequently  value,  as  a 
well-furnished  house  or  a  nourishing  diet. 

We  may  thus  conclude  that  economic  value  is  the  worth, 

without  any  necessary  regard  to  the  usefulness,  that  is 

attached  to  material  wealth.     If,  now,  we  stop  to 

Forms  of  .  '  \  . 

economic  consider  for  a  moment,  we  shall  see  that  this 
worth  may  be  estimated  either  by  the  individual 
for  his  own  special  use,  or  by  the  whole  group  for  purposes 
of  exchange.  This  difference  in  the  method  of  estimating 
the  worth  of  economic  goods  gives  rise  to  two  forms  of  eco- 
nomic value  :   value  in  use  and  value  in  exchange. 

Value  in  use  is  purely  subjective  ;  that  is,  it  is  simply  an 
individual  estimate  of  the  worth  of  a  given  commodity. 
Value  in  One  individual  may  value  a  certain  economic 
use-  good  far  more  highly  than  would  another  in- 

dividual. In  this  determination  of  value,  personal  pecu- 
liarities play  a  large  part.  For  example,  a  silver  spoon 
that  has  become  an  heirloom  may  satisfy  such  an  intense 
want  in  an  individual  that  he  will  value  it  far  beyond  its 
intrinsic  worth.  This  individual  valuation  of  the  spoon 
is  clearly  not  a  measure  of  its  social  value.  In  a  similar 
manner,  an  old  and  time-honored  homestead  may  be  more 
highly  valued  by  the  descendant  of  the  original  owner  than 
by  the  community  at  large.     While  these  may  be  exagger- 


Value  and  Price  319 

ated  cases,  nevertheless,  it  is  perfectly  true  that  individual 
valuations  are  not  just  estimates  of  values  put  upon  goods 
by  society  as  a  whole.  Therefore,  economics  is  concerned 
primarily  with  the  second  kind  of  economic  value,  —  value 
in  exchange. 

Value  in  exchange  is  a  social  valuation  placed  upon  an 
economic  good  by  a  number  of  persons.  Therefore,  in 
determining  value  in  exchange,  the  good  is  value  in 
looked  upon,  not  from  the  standpoint  of  its  exchan&e- 
utility  to  a  single  individual,  but  from  the  point  of  view 
of  its  worth  to  a  whole  group  of  people.  Thus,  value  in 
exchange  is  the  social  estimate  of  the  Worth  of  an  economic 
good  and  represents,  in  the  words  of  Professor  H.  R.  Seager, 
the  "  power  of  a  good  to  command  other  goods  in  exchange 
for  itself." 

In  estimating  this  exchange  value  of  a  commodity, 
utility  and  scarcity  play  the  determining  parts.  Now 
utility,  itself,  is  variable.  In  discussing  this  subject 
under  the  head  of  consumption,  we  saw  that  to  the  tired 
traveler  the  utility  of  the  first  apple  is  much  greater  than 
the  utility  of  the  third  apple  ;  and  that,  in  consuming  apples, 
man  soon  reaches  a  stage  when  his  desire  for  apples  is 
satisfied.  The  utility  of  the  apple  at  this  point  is  called  its 
marginal  utility,  and  it  is  upon  this  marginal  utility  that 
value  in  exchange  depends.  Furthermore,  it  is  not  the 
marginal  utility  of  a  commodity  to  a  single  individual  that 
determines  its  exchange  value  ;  but  it  is  its  marginal  utility 
to  a  whole  community  that  is  the  measure  of  this  value. 
Thus,  exchange  value  depends  upon  the  estimate  that 
society  places  on  marginal  utilities. 

In  determining  the  exchange  value  of  a  given  commodity, 
the  question  of  marginal  utility  depends  not  only  upon  the 


320  American  Economic  Life 

social  estimate  of  its  worth,  but  also  upon  its  scarcity.  This 
fact  is  popularly  expressed  by  saying  that  the  value  of  an 
economic  good  varies  with  the  relation  of  supply  and  de- 
mand. This,  however,  is  only  another  way  of  saying  that 
exchange  value  depends  upon  marginal  utility,  because  an 
increase  in  the  supply  of  a  commodity  means  a  decrease 
in  its  marginal  utility ;  and  this,  in  turn,  the  demand  re- 
maining the  same,  means  a  fall  in  value.  On  the  other 
hand,  a  decrease  in  the  supply  of  a  good  means  an  increase 
in  its  marginal  utility,  and  a  corresponding  rise  in  value, 
if  the  demand  remains  unchanged.  From  this  standpoint, 
therefore,  the  amount  or  scarcity  of  a  commodity  (supply) 
taken  in  conjunction  with  the  intensity  of  its  want-satisfy- 
ing quality  or  utility  (demand)  determines  value  in  ex- 
change. 

For  example,  if  the  demand  remains  the  same  and  there 
is  an  increase  in  the  supply  of  turkeys,  their  marginal 
utility  will  decline  and  their  exchange  value  fall.  But  if, 
with  the  approach  of  Christmas,  the  demand  for  turkeys 
increases  and  the  supply  remains  stationary,  the  marginal 
utility  of  turkey  will  become  greater  and  the  exchange 
value  higher.  This  relation  between  supply  or  goods, 
on  the  one  hand  (scarcity),  and  demand  or  wants,  on 
the  other  (utility),  is  the  key  to  the  determination  of 
economic  value. 

Price.  —  Since  value  in  exchange  is  a  relation  between 
goods,  society  must  devise  some  accurate  method  of  measur- 
What  mg  this  relationship.     Although  every  economic 

price  is.  good  has  the  power  to  command  another  good 
in  exchange  for  itself,  it  is  necessary  to  measure  the  value 
of  each  good  in  terms  of  a  standard  commodity.  In  most 
advanced  societies,  gold  is  this  standard  commodity ;    and 


Value  and  Price  321 

money  is  the  common  measure  of  economic  values.  There- 
fore, price  is  exchange  value  expressed  in  terms  of  money. 
When,  for  example,  we  wish  to  express  the  exchange  value 
of  some  commodity,  such  as  a  pear,  we  do  so  in  terms  of 
some  other  commodity  which  is  used  as  a  standard  of 
measuring  all  values.  We  do  not  say  that  the  pear  is  worth 
two  apples,  but  that  the  pear  is  worth  two  cents  ;  because 
money,  not  apples,  is  the  standard  by  which  all  economic 
values  are  measured  Money  thus  becomes  a  common 
denominator  of  value,  and  prices  are  expressed  in  terms  of 
this  commodity. 

Under  conditions  of  free  competition,  buyers  and  sellers 
meet  on  a  common  ground  —  the  market  place  —  and  there 
determine  price  by  deciding  the  value  of  com- 
modities.    The  value  agreed  upon  is  the  price,  mined: 
and  it  is  expressed  in  terms  of  money.     The  when 
price  will  depend  upon  the  law  of  supply  and  ™s™rpeeetUton 
demand  governing  value.     The  seller  will  look 
at  the  problem  largely  from  the  standpoint  of  production, 
and  the  buyer  from  the  standpoint  of  consumption.     This 
method  of  determining  price  is  still  in  vogue,  to-day,  in 
backward  and  rural  communities.     In  fact,  even  in  some 
civilized  European  countries,  such  as  Greece  and  Italy, 
"  bargaining  "  is  still  resorted  to  as  a  method  of  determin- 
ing prices.     Usually,  however,  in  large  modern  societies, 
the  "  one  price  "  system  has  been  adopted.     That  is,  the 
seller  estimates  the  value  of  the  good  to  the  community  in 
terms  of  price.     If  his  estimate  is  correct  or  nearly  so,  he 
sells  the  commodity  ;  if  not,  he  changes  the  price  to  conform 
to  the  social  estimate.     Thus,  price  represents  the  point 
at  which  the  seller  and  the  buyer  meet  in  their  estimate  of 
value. 


322  American  Economic  Life 

From  this  discussion  we  have  seen  how  price  would  be 
determined  normally.  On  the  one  hand,  among  pro- 
When  ducers  there  would  be  free  competition,  and, 

competition     on  the  other,  among  consumers  there  would  be 

is  not  free.  .  .  .   ,  . 

wants  ol  varying  degrees  of  intensity ;  while 
the  law  of  supply  and  demand  would  form  the  backbone 
of  the  whole  process.  But  conditions  are  not  always  as 
here  depicted.  In  fact,  in  modern  industrial  society,  con- 
ditions of  production  are  continually  changing.  Com- 
petition gives  way  to  monopoly,  and  cost  of  production 
sometimes  plays  a  diminishing  part  in  determining  prices. 
Consequently,  in  this  absence  of  competition,  the  monopo- 
list fixes  the  price  at  a  point  which  affords  him  the  greatest 
monopoly  profits. 

Thus  price  may  be  viewed  from  the  theoretical,  or  from 
the  practical  standpoint.  When  ideal  conditions  of  free 
The  competition  prevail,  price  will  tend  to  fluctu- 

conciusion.  ate  according  to  cost  of  production.  Under 
these  conditions,  the  theoretical  laws  of  value  will  really 
determine  prices.  But,  at  present,  prices  are  not  so 
ideally  determined  in  American  society.  The  development 
of  large  scale  production  has  tended  to  curtail  competition 
and  to  strengthen  monopoly.  Under  these  conditions, 
prices  may  be  fixed  without  any  necessary  regard  to  cost  of 
production.  Therefore,  if  we  would  understand  how  prices 
are  actually  determined,  we  must  investigate  to  what  extent 
monopolistic  combinations  are  prevalent  in  the  United 
States,  and  the  effect  of  their  monopoly  power  upon 
prices. 


Value  and  Price  323 

QUESTIONS  FOR  RECITATION 

1.  Explain  the  importance  of  exchange  to  society. 

2.  State  the  popular  meaning  of  value.     Give  an  example. 

3.  Name  the  requisites  of  economic  value.     Define  each. 

4.  Show  why  both  utility  and  scarcity  are  necessary  to  economic 
value.     Give  examples. 

5.  Why  is  material  wealth  sometimes  defined  as  "that  which  has 
exchange  value"? 

6.  May  a  useless   thing  possess  economic  value?    Why?    A 
harmful  thing  ?    Why  ? 

7.  Name  two  forms  of  economic  value.  Define  and  give  an  ex- 
ample of  each. 

8.  Explain  clearly  the  difference  between  use  value  and  ex- 
change value. 

9.  Show  how  value  in  exchange  is  determined  —  stating  the  two 
factors  in  the  case. 

10.  Explain  clearly  the  effect  of  supply  and  demand  upon  ex- 
change value ;  give  an  example. 

11.  What  is  price? 

12.  What  is  the  relation  between  price  and  value? 

13.  How  are  prices  determined  under  free  competition? 

14.  What  determines  price  when  competition  is  not  free  ? 

15.  How  are  prices  determined  in  the  United  States  to-day? 

PROBLEMS   FOR  DISCUSSION 

1.  Does  every  good  possess  economic  value?  Why?  Does 
everything  which  possesses  utility  possess  economic  value?  Why 
not? 

2.  Have  the  following  value :  a  gambler's  pack  of  cards,  clothes 
of  antiquated  fashion,  opium,  air,  tobacco  ?     State  reason  in  each  case. 

3.  If  wealth  increases,  will  there  be  a  greater  sum  total  of  ex- 
change value  in  the  community?  What  is  the  relation  of  wealth  to 
exchange  value  ? 

4.  Is  an  encyclopedia  wealth  ?    Among  Indians  ?    Has  it  value  ?  . 

5.  "Whisky  is  not  wealth.  It  has- no  permanent  value  for 
society."    In  what  sense  is  the  term  "value"  used? 


324  American  Economic  Life 

6.  A  mercantile  establishment  advertises  "the  best  values  in  the 
city."     What  is  meant  here  by  value? 

7.  Could  a  thing  have  value  unless  it  was  desired?     Unless  it 
was  scarce  ?     State  the  reasons. 

8.  Draw  up  a  sentence  in  which  value  is  used  in  the  sense  in  which 
the  economist  uses  it. 

9.  Would  a  bag  of  gold  have  value  to  a  shipwrecked  sailor  on  a 
rocky  and  deserted  island  ?     Would  a  loaf  of  bread  ?     Why  ? 

10.   Explain  the  importance  of  the  idea  of  price  to  society, 
n.    Can    all   values    rise?     Can    all   prices    rise?     Explain    the 
reasons. 

SUPPLEMENTARY  READING 

Carver,    T.    N.     Principles   of  Political   Economy,    Chaps.    XXII, 

XXIII. 
Clark,  J.  B.     Philosophy  of  Wealth,  Chaps.  V  and  VI. 
Clay,  H.     Economics,  Chaps.  XIV,  XV. 
Ely,  R.  T.     Outlines  of  Economics,  Chaps.  X-XI. 
Fetter,  F.  A.     Principles  of  Economics,  Chap.  V. 
Marshall,  A.     Principles  of  Economics,  Book  V. 
Mill,  J.  S.     Principles  of  Political  Economy,  Book  III,  Chap.  I. 
Seager,  H.  R.    Introduction  to  Economics,  Chap.  V. 


CHAPTER  XXXIII 

Price  and  Monopoly 

I.   Monopoly  power 
i.   How  measured 

2.  How  limited 

3.  Size  not  essential 

II.    Kinds  of  monopolies 

1 .  Industrial  monopolies  : 

a.  Created  by  law : 

(1)  Through  control  of  natural  resources 

(2)  Through  patents  and  copyrights 

b.  Created  by  organization 

c.  Created  by  both 

2.  Franchise  monopolies : 

a.  Transportation 

(1)  Railroads 

(2)  Electric  traction 

b.  Power  and  light 

3 .  Labor  monopolies  : 

a.  Personal  monopoly 

b.  Monopoly  of  organization 

4.  Public  monopolies 

5.  Natural  monopolies 

6.  Conclusion 

Monopoly  Power.  —  At  present  the  factor  of  monopoly 
is  one  of  the  chief  elements  in  fixing  price.     Popularly,  the 
term  "  monopoly  "  is  applied  to  any  large  in-  How 
dustrial  organization  having  more  or  less  ex-  measured- 
elusive  control  over  its  product.     But  from  an  economic 
standpoint,   an  organization  is   a   monopoly   only   when, 

325 


326  American  Economic  Life 

through  crushing  competition  and  controlling  output,  it 
is  in  a  position  to  fix  price  without  regard  to  the  laws  of 
value.  In  other  words,  a  monopoly  is  an  organization 
with  the  power  to  fix  price  above  or  below  a  competitive 
level.  The  only  real  measure  of  the  existence  of  monopoly 
is  its  price-fixing  power. 

Observe  that  while  price-fixing  capacity  is  the  test  of 
monopoly,  it  does  not  necessarily  follow  that  the  monopoly 
How  can  fix  any  price  that  it  chooses.     For  example, 

limited.  [f  a  COmpany  had  a  monopoly  of  iron  ore  and 
fixed  the  price  at  a  prohibitive  figure,  industry  would  sub- 
stitute cement  for  iron  to  such  an  extent  that  either  the 
price  would  not  be  maintained,  or,  if  it  were  maintained, 
the  product  would  remain  unsold.  Thus  the  power  of  the 
consumer  to  substitute  one  commodity  for  another  limits 
the  power  of  monopoly  to  fix  any  price  it  might  desire. 

This  power  to  fix  price  which  determines  monopoly  may 
relate  to  the  production  of  a  commodity  on  a  very  large 
Size  not  scale  or  on  a  very  small  scale.  For  example, 
essential.  j-ne  original  Standard  Oil  Company  unques- 
tionably had  monopoly  power,  since  it  had  the  power  to 
fix  the  price  of  petroleum  and  petroleum  products  above  a 
competitive  level.  The  same  thing  is  probably  true  to-day 
of  the  manufacturers  of  plate  glass  and  of  the  manufacturers 
of  print  paper.  These  businesses  are  very  large,  and  the 
products  in  which  they  deal  are  widely  used  and  of  great 
value.  On  the  other  hand,  a  manufacturing  company  may 
be  engaged  in  the  production  of  articles  that  are  used  by 
only  a  few  people,  and  its  possibilities  of  growth  may  thus 
be  extremely  limited.  This  is  the  case,  for  example,  with 
the  manufacturers  of  psychological  instruments.  But 
even  here,  there  is  monopoly  power.     In  fact,  the  demand 


Price  and  Monopoly  327 

for  these  instruments  is  so  small  that  those  who  make  them 
charge  for  them  prices  which  are  out  of  all  proportion  to 
their  cost  of  production.  In  the  case  of  glass  and  paper, 
the  monopoly  power  is  exercised  to  a  limited  degree ;  in 
the  case  of  psychological  appliances,  the  monopoly  power 
is  very  great,  and  the  monopoly  price  far  exceeds  the  com- 
petitive one. 

Kinds  of  Monopolies.  —  Monopolies  may  be  divided  into 
five  groups:  (1)  industrial  monopolies,  (2)  franchise  mo- 
nopolies, (3)  labor  monopolies,  (4)  public  mo-  industrial 
nopolies,  and  (5)  natural  monopolies.  Indus-  monopolies: 
trial  monopolies  may  be  subdivided  into  three  classes,  — 
those  created  by  law,  those  created  by  organization,  and 
those  created  by  both  law  and  organization. 

Industrial  monopolies  are  created  primarily  by  law. 
They  usually  base  their  monopoly  power  on  the  control  of 
natural  resources,  and  this  control  is  made  created  by 
possible  only  through  existing  forms  of  prop-  law- 
erty  law.  Thus,  the  control  of  natural  resources,  sanctioned 
by  law,  is  characteristic  of  many  industrial  combinations. 
The  development  of  modern  industry  has  taught  the  manu- 
facturer that  his  highest  effectiveness  can  be  maintained 
only  when  he  has  control  of  all  the  processes  of  production, 
from  the  raw  material  in  the  earth  to  the  finished  product 
ready  for  shipment.  Such  a  monopoly  control  of  resources 
is  the  most  effective  method  of  preventing  competition, 
because  the  supply  of  natural  resources  is  limited  and  the 
demand  for  them  is  always  increasing.  The  International 
Harvester  Company,  which  controls  the  forests  from  which 
it  cuts  the  timber  and  the  mines  from  which  it  digs  the  iron 
and  coal  for  the  manufacture  of  its  machinery,  is  typical 
of  a  great  group  of  integrated  industries.     Through  natural 


328  American  Economic  Life 

resource  monopoly,  the  great  industrial  corporations  are 
often  enabled  to  fix  monopoly  prices. 

Patents  and  copyrights  constitute  the  second  element 
in  maintaining  industrial  monopolies  created  by  law.  Al- 
though less  permanent  than  the  monopoly  of  natural  re- 
sources, patents  and  copyrights,  while  they  exist,  are  more 
absolute.  While  there  are  natural  resources  of  many  kinds 
in  different  parts  of  the  country,  a  patent  once  secured  gives 
•  to  the  owner  sole  right  for  many  years  to  manufacture  that 
particular  article.  The  same  thing  holds  true  of  copyrights, 
trade-marks,  patented  processes,  and  the  like.  The  bread 
formulas  of  the  great  baking  companies,  the  cigar  labels 
and  trade-marks  of  the  cigar  manufacturers,  the  patented 
processes  for  making  paint  and  other  similar  products,  are 
all  illustrations  of  a  monopoly  power  based  upon  this  form 
of  legal  control. 

On  the  other  hand,  organization  may  be  the  primary 
factor  in  developing  an  industrial  monopoly.  The  Ameri- 
Created  b  can  ^ce  Company,  for  example,  is  dealing  in  a 
organiza-  product  which  may  be  secured  almost  any- 
where in  the  northern  part  of  the  United 
States ;  yet  it  is  able,  in  certain  cities,  to  charge  what  ap- 
pears to  be  a  monopoly  price  because  it  controls  the  ma- 
chinery of  ice  delivery  in  those  places.  In  the  same  way, 
largely  through  the  control  of  the  retail  tobacco  business, 
the  original  American  Tobacco  Company  was  enabled  for 
many  years  to  charge  monopoly  prices. 

In  most  of  the  industrial  combinations,  however,  both 
law  and  organization  play  a  part.  The  United  States 
Created  by  Steel  Corporation  depends  upon  its  natural 
both.  resources,    upon    its    formulas,    and    upon    its 

effective   business   organization.     Although   this   business 


Price  and  Monopoly  329 

is  one  of  the  largest  in  the  country,  the  Supreme  Court  of 
the  United  States  in  1920  declared  it  was  not  an  illegal 
combination.  The  court  showed  that  mere  size  was  not 
sufficient  to  constitute  a  monopoly  in  restraint  of  trade, 
and  declared  that  the  existence  of  other  competing  com- 
panies proved  that  the  United  States  Steel  Corporation  did 
not  have  the  absolute  power  to  fix  the  price  of  its  product. 

The  second  form  of  monopoly,  a  monopoly  through  fran- 
chise, is  absolute.  If  the  franchise  is  perpetual,  the 
monopoly  is  likewise  perpetual.  Even  though  Franchise 
provisions  are  made  in  franchises  to  limit  the  monopolies: 
prices  which  shall  be  charged  for  services,  monopoly  power 
still  exists  because  the  corporation  may  fix  the  price 
above  a  competitive  level.  This  kind  of  monopoly  usually 
grants  the  privilege  of  furnishing  transportation,  power, 
or  light. 

The  greatest  form  of  franchise  monopoly  is  the  railroad. 
Enough  has  been  said  to  show  that  railroads  are  essentially 
monopolies,  and  to  show  that,  because  of  their  Trans por- 
fight  of  eminent  domain  and  their  control  over  tahon- 
the  district  through  which  they  pass,  they  are  enabled  in 
the  absence  of  governmental  restraint  to  fix  monopoly 
prices,  —  exacting  "  all  that  the  traffic  will  bear."  There 
was  formerly  no  better  illustration  in  the  country  of  the 
fixing  of  monopoly  price  than  that  furnished  by  the  rail- 
road industry.  It  is  for  this  very  reason  that  the  federal 
government  now  supervises  the  making  of  railroad  rates. 
Heretofore,  the  predominant  factor  affecting  the  price  of 
railroad  transportation,  in  the  absence  of  some  form  of 
competition,  has  always  been  the  price  that  people  were 
willing  to  pay. 

Suburban  electric  trolley  lines  are  assuming  a  position  of 


33°  American  Economic  Life 

greater  importance  in  the  group  of  franchise  monopolies. 
Therefore,  as  interurban  transportation  develops,  the 
franchises  secured  by  the  present  interurban  companies 
will  give  them  almost  as  great  monopoly  power  as  that 
formerly  possessed  by  the  railroads.  It  is  in  cities,  how- 
ever, that  the  franchise  monopoly  of  transportation  assumes 
very  great  importance.  Trolley  lines,  subways,  and  'bus 
companies  often  possess  great  monopoly  power.  For  ex- 
ample, in  a  city  of  one  million  and  a  half,  the  competitive 
cost  of  transportation  perhaps  does  not  exceed  three  or 
four  cents  per  passenger,  yet  the  actual  price  paid  by  the 
passenger  is  usually  from  five  to  eight  cents.  This  differ- 
ence between  the  price  paid  and  the  competitive  price  repre- 
sents the  extent  of  the  monopoly  power. 

The  other  leading  form  of  municipal  franchise  monopoly 
—  the  monopoly  over  power  and  light  —  is  chiefly  seen  in 
Power  and  the  control  of  electricity  and  gas.  Water 
light.  power  is  being  gradually  converted  into  elec- 

tric power,  which  is  transported  sometimes  as  far  as  two 
hundred  and  fifty  miles.  The  widespread  use  of  coal  pre- 
vents the  power  companies  from  exercising  their  real 
monopoly  power,  but  in  the  course  of  the  century  the 
diminution  of  the  coal  supply  will  increase  the  monopoly 
of  the  holders  of  water-power  franchises.  Light  and  tele- 
phone service  are  also  furnished  through  franchise  monop- 
olies. Companies  carry  on  these  businesses  under  franchises 
of  long  duration  by  means  of  which,  in  the  absence  of  public 
restraint,  they  are  enabled  to  charge  prices  that  are  con- 
siderably higher  than  they  would  be  under  conditions  of 
pure  competition. 

Labor  monopolies  may  be  in  the  form  of  personal  mo- 
nopoly or  monopoly  of  organization.    In  both  cases,  they  aim 


Price  and  Monopoly  331 

to  fix  the  price  of  labor.     Personal  monopoly,  which  is 
the  result  of  special  ability  or  training,  is  in  very  distinct 
contrast  to  the  monopoly  of  organization  which  is 
the  result  of  cooperative  effort.    Personal  monop-  monopo- 
olv  demands  a  high  salary  for  the  individual, 

f„  *  7  •        .  1      Personal. 

while  monopoly  of  orgamzation  secures  stand- 
ardized wages,  and  proper  working  conditions,  for  the  mem- 
bers of  the  group. 

The  trade-union  principle  is  necessarily  monopolistic; 
that  is,  it  attempts  to  fix  wages  without  regard  to  competi- 
tion. The  object  of  the  union  is  so  to  organize  0  iza_ 
and  control  the  supply  of  labor  that  competi-  tion  mo- 
tion will  be  impossible.  Thus,  a  price  will  be 
fixed  for  labor,  which  will  represent  the  monopoly  power  of 
the  organization  rather  than  the  productive  capacity  of  the 
individual  members  of  the  union,  or  the  competitive  wage 
which  would  be  fixed  if  each  union  member  was  bargaining 
individually  for  himself.  As  in  the  case  of  railroads,  the 
principle  which  dominates  union  activity  is  to  charge  "  all 
that  the  traffic  will  bear."  For  example,  the  building 
trade-unions,  which  have  a  great  monopoly  power,  com- 
mand a  much  higher  wage  than  some  of  the  more  skilled 
operators  in  the  tailoring  trades,  where  unions  are  weak  and 
monopoly  power  comparatively  small.  In  the  first  case, 
the  supply  of  laborers  has  always  been  limited  ;  in  the  sec- 
ond case,  hordes  of  immigrants  have  for  many  years  over- 
loaded the  market  and  made  a  competitive  wage  possible. 
Since  labor  has  been  organized  on  national  and  international 
lines,  it  has  greatly  enlarged  its  monopoly  power  and 
increased  the  possibility  of  controlling  its  price. 

Public  monopolies  may  be  either  municipal,  state,  or  na- 
tional.    The  public  municipal  monopolies  deal  with  trans- 


S32  American  Economic  Life 

portation,  water,  light,  the  control  of  sanitation  and  health, 
and  provision  for  police  and  fire  protection.  The  state 
Public  monopolies  are  monopolies  of  license  fees,   in- 

monopoiies.  corporation  fees,  charter  granting,  and  the  like. 
The  national  monopolies  include  the  carrying  of  mails, 
the  printing  of  documents,  the  building  of  irrigation 
dams,  and  other  activities  which  the  government  may  and 
does  assume.  Therefore,  in  these  monopolies,  prices  neces- 
sarily vary  from  the  competitive  rate.  In  fact,  the  prices 
for  some  government  services  are  considerably  below  the 
competitive  rate.  The  essential  factor  in  monopoly  is, 
therefore,  not  the  fixing  of  high  price  through  monopoly 
power,  but  the  fixing  of  any  price  through  monopoly  power. 
Like  public  monopolies,  natural  monopolies  really  con- 
stitute another  cross-classification  of  monopolies  pre- 
Naturai  viously  mentioned.  The  determining  quality  of 
monopolies.  natural  monopolies  arises  (i)  from  the  naturally 
limited  supply  of  certain  raw  materials  of  industry,  and 
(2)  from  the  inherent  nature  of  certain  business  enterprises. 
Because  of  the  limited  supply  of  coal,  petroleum,  and  other 
mineral  deposits  essential  to  industry,  it  is  possible  for 
organizations  to  secure  a  practical  monopoly  of  such  re- 
sources. When  this  occurs,  a  natural  monopoly  arises. 
Such  a  monopoly  is  found  in  the  control  by  certain  interests 
of  the  larger  part  of  the  anthracite  coal  beds  of  Pennsylvania. 
Because  of  this  control,  the  owners  of  these  mines  are  en- 
abled to  fix  the  price  of  coal  at  a  point  far  above  the  com- 
petitive level.  Another  kind  of  natural  monopoly  is  that 
which  arises  from  the  peculiar  nature  of  the  business  itself. 
Of  such  a  character  are  railroads,  telegraph  and  telephone 
companies,  street  car  lines,  water  and  light  companies,  and 
similar  businesses.     In  such  enterprises  it  is  found  that  the 


Price  and  Monopoly  333 

very  nature  of  the  business  is  antagonistic  to  competition. 
The  original  cost  of  construction  is  so  great  in  these  cases 
that  it  is  usually  a  waste  of  capital  to  duplicate  the  work 
already  accomplished.  For  this  reason  the  first  successful 
company  in  the  field  enjoys  the  natural  monopoly  of  per- 
forming the  service.  Since  it  is  useless  in  these  cases  to  rely 
upon  competition  as  a  determinant  of  price,  it  is  necessary, 
in  the  interest  of  public  welfare,  for  the  government  to  de- 
termine the  limits  of  the  monopoly  power  of  such  combina- 
tions. 

The  number  of  ways  in  which  monopoly  power  is  ex- 
pressed in  monopoly  price  is  constantly  increasing;  and 
the  problem  of  monopoly  is,  therefore,  of  con-  The 
stantly  greater  concern  to  the  modern  state.  conclusion- 
In  a  monopoly  regime,  the  ordinary  laws  of  price  are 
largely  suspended.  The  usual  law  of  demand  and  supply  is, 
for  the  time  being,  thrown  into  the  background ;  and,  in 
the  presence  of  monopoly,  a  peculiar  condition  of  affairs 
exists  whereby  price  is  determined  not  so  much  through 
competition  as  through  some  form  of  monopoly  power. 
Under  such  circumstances,  therefore,  it  becomes  imperative 
for  public  authority  to  act  in  the  interest  of  social  welfare. 

QUESTIONS   FOR  RECITATION 

1.  Define  monopoly  power.  Explain  its  importance  in  America 
to-day. 

2.  How  may  the  consumer  limit  the  exercise  of  monopoly  power 
on  the  part  of  the  producer  and  the  distributor  of  goods  ?  Give  some 
examples. 

3.  During,  and  after,  the  World  War  how  was  the  power  of  sub- 
stitution exercised  ? 

4.  When  prices  are  unusually  or  exorbitantly  high,  how  may  this 
power  be  utilized  by  the  consumer  for  his  own  good?  What  are  its 
limitations  ? 


334  American  Economic  Life 

5.  Is  mere  size,  or  "bigness,"  essential  to  monopoly  power  in 
an  organization  ?     Prove  your  position. 

6.  What  do  industrial  monopolies  rest  upon?     Classify  them; 
give  an  example  of  each. 

7.  Why  is  the  control  of  natural  resources  important  to  an  in- 
dustrial monopoly  ? 

8.  Why  is  organization  important  ? 

9.  What  is  the  effect  of  patents  and  copyrights?     Are  they 
justifiable?    Why? 

10.  Explain  the  meaning  of  franchise  monopolies.     Name  the 
different  kinds. 

11.  Discuss  the  effect  of  franchise  monopolies.     How  should  they 
be  limited  ? 

12.  How  would  car  fares  be  affected  by  the  restoration  of  the 
principle  of  competition  ?     Why  do  we  not  return  to  this  principle  ? 

13.  What  is  the  remedy  for  exorbitant  charges  for  public  utili- 
ties? 

14.  Explain    the    monopoly    power    exercised    by    labor.     How 
does  this  affect  the  prices  of  goods  ? 

15.  Name  some  public  monopolies. 

16.  How  do  public  monopolies  differ  from  private  monopolies  in 
regard  to  price  fixing? 

17.  What  is  meant  by  natural  monopolies  ?     Give  some  examples. 

18.  Would  you  say  that,  to-day,  all  prices  are  determined  by  the 
theoretical  laws  of  value  ?     State  your  reasons. 

PROBLEMS  FOR  DISCUSSION 

1.  How  old  is  the  problem  of  monopoly? 

2.  Outline  the  different  kinds  of  monopolies. 

3.  Mention  some  monopolies  of  which  you  have  knowledge, 
and  explain  what  monopoly  advantages  they  enjoy. 

4.  How  is  monopoly  price  determined? 

5.  Explain  the  difference  between  monopoly  price  and  com- 
petitive price. 

6.  State  the  law  of  monopoly  price. 

7.  What  advantages  are  claimed  for  public  ownership  of  natural 
monopolies  ? 


Price  and  Monopoly  335 

8.  Should  the  government  attempt  to  regulate  price  when  a 
monopoly  is  shown  to  exist  ?    Explain  the  possible  danger. 

9.  Is  it  desirable  in  the  government  to  allow  a  monopoly  to 
charge  different  net  prices  for  the  same  commodity  ? 

10.  What  relation  should,,  in  the  interest  of  public  welfare,  be 
established  between  monopoly  and  price  ? 

11.  Are    all    monopolies    trusts?     Are    all    trusts    monopolies? 
Why? 

12.  How  may  the  problem  of  monopoly  in  America  be  solved? 

SUPPLEMENTARY   READING 

Clay,  H.    Economics,  Chaps.  VII,  VIII. 

Ely,  R.  T.     Outlines  of  Economics,  Chap.  XII. 

Ely,  R.  T.     Monopolies  and  Trusts,  Chaps.  I-IV. 

Hobson,  J.  A.    Evolution  and  Modern  Capitalism,  Chap.  IX. 

Marshall,  A.    Principles  of  Economics,  Book  V,  Chap.  XIV. 

Taussig,  F.  W.     Principles  of  Economics,  Vol.  I,  Chap.  XV. 


CHAPTER  XXXIV 

Money  Problems 

I.   Primitive  method  of  exchange 
i.   Barter 

2.   Difficulties  of  barter 

II.    Modern  method  of  exchange 
i .   Why  money  is  necessary 

2.  Uses  of  money: 

a.  Measure  of  value 

b.  Medium  of  exchange 

c.  Standard  of  deferred  payments 

3.  Characteristics  of  money 

III.  Kinds  of  money 

1 .  Early  forms 

2.  Metallic  money : 

a.  Gold  and  silver 

b.  Currency  Act  of  1900 

c.  Gresham's  law 

3.  Paper  money: 

a.  Advantages  and  disadvantages 

b.  Kinds  of  paper  money 

c.  Fiat  money 

IV.  Quantity  of  money 

1.  Prices  and  values 

2.  Money  and  prices 

3.  Money  and  goods 

4.  The  outlook 

Primitive   Method   of  Exchange.  —  In  primitive   com- 
munities  exchange  is  accomplished  without    the    use  of 

336 


Money  Problems  337 

money,  by  means  of  barter.  For  example,  if  to-day  you 
were  to  take  a  trip  to  Alaska  and  attempt  to  buy  frozen 
fish  from  a  native,  you  would  be  compelled  to  ^^^  • 
give  gold  dust  in  exchange  for  the  fish.  If  the 
fisherwoman  demanded  a  little  more  than  you  offered  for 
a  particular  fish,  you  would  add  to  the  gold  dust  grain  by 
grain,  until  you  finally  reached  a  quantity  satisfactory  to 
both.  If  you  desired  an  additional  fish,  you  would  be  com- 
pelled to  go  through  exactly  the  same  process,  —  the 
amount  of  gold  dust  varying  each  time  with  the  size  and 
character  of  the  fish. 

In  the  above  illustration  the  process  of  barter  was 
rather  easily  accomplished.  If  one  person  has  gold  dust 
and  another  person  has  fish,  and  both  wish  to  Difficulties 
exchange,  some  sort  of  transfer  can  be  effected.  of  barter- 
But  suppose  one  man  has  bearskins  and  another  has  fish, 
and  neither  desire  what  the  other  has,  the  problem  of  ex- 
change becomes  more  complicated.  Barter  is  inadequate 
because  it  is  extremely  difficult  to  find  two  persons  each 
having  exactly  what  the  other  desires,  and  each  willing 
to  part  with  his  possession ;  and  even  when  these  condi- 
tions have  been  met,  it  is  still  necessary  that  an  agreement 
be  reached  as  to  the  relative  values  of  the  goods  under 
consideration. 

Modern   Method   of   Exchange.  —  In   modern   society, 
some    other    method    of    exchange    becomes    imperative. 
No  community  in  which  the  exchange  of  com-  Wh 
modi  ties  is  a  difficult  and  cumbersome  process  money  is 
can    advance    to    any    considerable    degree    of 
civilization.     A  simple  and  effective  instrument  of  exchange 
is  as  necessary  to  the  progress  and  welfare  of  mankind  as 
are   improvements   in   the   process   of   production   itself. 


33 8  American  Economic  Life 

Therefore,  man  makes  use  of  money  as  a  convenient  means 
of  exchanging  one  commodity  for  another.  Money  is  not 
an.  end  in  itself,  but  merely  a  means  of  securing  what  is 
wanted  through  the  process  of  exchange. 

Money  serves  two  fundamentally  useful  purposes,  and 

fulfills  an  important  secondary  function.     In  the  first  place, 

money  serves  as  a  common  measure  of  value 

money:         because  it  is  used  as  a  medium  for  the  expres- 

Measureof     s[on  0f  value   in   terms   of  price.     Under   the 

value. 

discussion  of  "  Value  and  Price  "  we  have  seen 
the  impracticability  of  attempting  to  gauge  the  values  of 
various  commodities  in  terms  of  each  other.  We  cannot 
measure  the  value  of  an  automobile  in  terms  of  a  motor  boat, 
or  vice  versa.  We  must  have  some  common  measure  of 
value  to  which  we  can  refer  the  values  of  all  economic 
goods.  Money,  in  civilized  communities,  has  come  to 
be  the  commodity  which  serves  the  purpose  of  measuring 
the  values  of  all  other  commodities.  Thus,  we  say  the 
automobile  is  valued  at  $2000  and  the  motor  boat  at 
$1500. 

Not  only  does  money  serve  as  a  common  denominator 
of  value,  but,  as  already  stated,  it  is  also  used  as  a  medium 
Medium  of  of  exchange.  These  two  functions  are  equally 
exchange.  important  and  mutually  interdependent.  When 
the  value  of  a  commodity  is  universally  recognized,  and 
when  this  commodity  serves  as  a  measure  of  the  values 
of  other  commodities,  the  article  so  used  naturally  becomes 
a  medium  for  the  exchange  of  all  other  economic  goods. 
Hence,  money  has  become  the  means  whereby  the  shoe- 
maker exchanges  his  shoes  for  food ;  the  tailor,  his  clothes 
for  furniture ;  the  steel  manufacturer,  his  steel  for  a  palatial 
residence.    In  short,  by  the  use  of  money,  every  producer 


Money  Problems  339 

exchanges  his  particular  commodity  for  what  he  requires 
to  sustain  and  enjoy  life. 

Because  money  is  a  measure  of  value,  it  is  also  used  as 
a  standard  for  the  future  payment  of  present  obligations. 
This    function    of    money    is    described    as    a  Standardof 
"  standard   of   deferred   payments."     In   order  deferred 

,         ,.  .,  .  P  payments. 

to  legalize  this  use  of  money,  governments 
usually  confer  upon  it  the  quality  of  legal  tender.  Under 
these  conditions,  the  money  so  described  as  legal  tender 
must  be  accepted  in  payment  of  debts.  It  will  readily  be 
seen  that  such  a  device  is  necessary  to  modern  business  life. 
When  a  man  contracts  a  debt  to-day,  payable  in  five  years, 
he  must  know  in  what  manner  his  debt  may  be  legally  dis- 
charged at  the  end  of  that  period.  Money  measures  the 
extent  of  his  obligation  and  constitutes  the  means  by  which 
it  is  cancelled. 

In  order  that  a  commodity  may  be  used  as  money,  it 
must  possess  certain  definite  characteristics.  In  the  first 
place,  money  must  have  value  as  a  commodity ;  Charac. 
and  furthermore,  this  value  must  be  generally  tensticsof 
recognized  and  comparatively  stable.  Of 
course,  since  money  has  a  commodity  value,  its  value  will 
not  be  absolutely  stable,  but  will  vary  in  accordance  with 
the  law  of  supply  and  demand  determining  all  commodity 
values.  This  means  that  when  the  commodity  used  as 
money  is  plentiful,  and  other  commodities  are  relatively 
scarce,  the  value  of  the  money  commodity  will  decline. 
However,  in  the  long  run,  the  value  of  money  must  be  com- 
paratively stable.  It  is  equally  important  that  money 
should  be  durable,  and  divisible  into  small  parts.  Without 
durability  there  can  be  no  lasting  value;  and  without 
divisibility,  it  is  impossible  to  secure  coins  of  small  value 


340  American  Economic  Life 

for  the  ordinary  exchanges  of  everyday  life.  Furthermore, 
money  must  be  portable.  In  modern  civilizations  this 
quality  is  especially  important  because  exchanges  are  so 
frequent  and  are  effected  at  such  great  distances.  A  bulky 
commodity  may  have  great  value  and  yet  fail,  in  this  im- 
portant respect,  to  meet  the  requirements  of  money. 

Kinds   of   Money.  —  In   primitive   communities,    many 
things  were  used  as  money  which  lacked  one  or  more  of 

these  qualities.     For  example,   Indian  "  warn- 
Early  forms. 

pum  "  was  of  no  great  value;     and  the  cattle 

used  as  money,  centuries  ago  in  Europe,  would  not  to-day 
be  considered  portable.  In  the  same  manner  wheat, 
although  having  universal  value,  would  not  make  good 
money  because  of  its  destructibility  and  great  bulk. 
Therefore,  men  have  come  to  employ  some  form  of  metal 
as  money.  In  early  societies,  as  in  Sparta,  iron  was  used ; 
and  in  other  places  copper  was  employed. 

To-day  gold  and  silver  fill  the  requirements  of  money 
much  more  perfectly  than  any  of  the  other  metals.  Be- 
sides  being  valuable,  portable,  and  durable, 
money:  they  are  easily  divisible  into  small  parts,  each 
Gold  and  one  0f  which  possesses  considerable  value.  To 
facilitate  the  use  of  gold  and  silver  as  money  and 
to  standardize  the  value  of  the  amounts  used,  the  govern- 
ment buys  gold  and  silver  bullion  and  converts  it  into  small 
coins.  These  coins  are  stamped  by  the  government  and 
their  value  is  guaranteed.  In  the  United  States,  accord- 
ing to  the  Act  of  1878,  the  dollar  is  equal  to  23.22  grains  of 
pure  gold,  or  371.25  grains  of  pure  silver.  In  each  case,  in 
order  to  make  the  coin  more  durable,  alloy  is  added  so  that 
the  "  standard  weight  "  of  the  gold  dollar  is  25.8  grains, 
while  that  of  the  silver  dollar  is  412.50  grains.     Thus  me- 


Money  Problems  341 

tallic  money  is  simply  gold  or  silver  converted  into  a  special 
form.  Therefore,  if  money,  as  compared  with  goods,  is 
plentiful,  that  is,  if  gold  and  silver  are  plentiful,  its  value 
decreases  as  would  that  of  any  other  commodity.  Since 
its  value  decreases,  a  particular  coin  is  able  to  purchase 
less ;  and,  therefore,  there  is  a  general  rise  in  prices.  On 
the  other  hand,  should  the  supply  of  gold  and  silver  decrease 
and  money  become  scarce,  as  compared  with  other  goods, 
its  value  would  increase  in  proportion,  and  there  would  be 
a  resulting  fall  in  prices. 

At  the  close  of  the  nineteenth  century,  in  order  to  stand- 
ardize the  fluctuating  market  values  of  gold  and  silver, 
the  United  States  Congress  passed  the  Gold  currency 
Standard  Act  of  March  14,  1900.  The  passage  Aa  °f  ^00- 
of  this  act  marked  the  culmination  of  a  nation-wide  dis- 
cussion of  the  money  question.  The  difficulty  in  the  situa- 
tion arose  from  the  steady  decline  in  the  market  value  of 
silver  in  terms  of  gold.  Toward  the  close  of  the  century 
the  old  ratio  between  the  two  metals  of  sixteen  to  one  had 
fallen  approximately  to  thirty-two  to  one.  That  is,  at  that 
time,  the  commodity  value  of  silver,  in  terms  of  gold,  was 
just  about  one-half  of  what  it  was  in  the  early  part  of  the 
nineteenth  century.  To  insure  the  financial  integrity  of 
the  United  States,  both  at  home  and  abroad,  Congress 
passed  the  Act  of  1900  which  expressly  states  that  the  gold 
dollar  shall  be  the  standard  of  value  in  this  country,  and 
that  all  other  kinds  of  money  shall  be  maintained  at  a 
parity  with  gold.  This  act  also  provided  for  the  mainte- 
nance of  a  special  reserve  fund  of  $150,000,000  in  gold,  or 
in  gold  and  redeemed  notes,  for  the  redemption  of  "  Green- 
backs "  or  United  States  Notes.  This  act  further  provided 
for  the  coinage  of  a  sufficient  quantity  of  silver  dollars  equal 


342  American  Economic  Life 

to  the  amount  of  the  Treasury  notes  of  1890  or  the  so-called 
Sherman  notes.  Since  1904,  however,  the  United  States 
has  ceased  coining  silver  dollars. 

By  establishing  a  single-standard  monetary  system,  and 
by  requiring  that  the  value  of  any  dollar  must  be  equal 
Gresham's  to  the  value  of  the  gold  in  a  gold  dollar,  the  Act 
law-  of  1900  eliminates  the  great  danger  sometimes 

coincident  with  bimetallism,  viz.,  the  operation  of  Gresham's 
law.  Sir  Thomas  Gresham,  who  was  Queen  Elizabeth's 
minister  of  finance,  called  attention  to  the  fact  that  when 
two  units  of  different  kinds  of  money  of  the  same  nominal 
value  circulate  as  legal  tender,  the  cheaper  unit  forces  the 
dearer  unit  out  of  circulation.  For  example,  under  the 
bimetallic  system,  because  of  the  fluctuating  market  values 
of  gold  and  silver,  the  silver  in  the  silver  dollar  may,  at  any 
given  moment,  be  of  less  value  than  the  gold  in  the  gold 
dollar.  Under  these  circumstances,  gold  dollars  are  melted 
into  bullion  and  sold  at  the  market  price  for  use  in  the  arts 
and  crafts.  This  means  that  the  silver  dollar  remains  in 
circulation  for  the  payment  of  debts,  and  illustrates  the  law 
of  Sir  Thomas  Gresham  that  "  bad  money  drives  out  good 
money." 

Metallic  money  is  a  great  step  beyond  barter.  It  stand- 
ardizes values  and  removes  the  disadvantages  connected 

with  individual  bargaining.  On  the  other  hand, 
|^eery:  metallic  money  has  certain  obvious  disadvan- 
Advantages  tages.  It  is  bulky,  clumsy  to  handle,  and  easily 
Idtfnta  es      ^ostt     These  objections  render  metallic  money 

less  desirable  than  an  advanced  form  of  money 
known  as  convertible  paper  money,  which  is  used  side  by 
side  with  metallic  money  in  civilized  societies.  Paper 
money  is  a  promise  to  pay,  and  so  long  as  this  promise  is 


Money  Problems  343 

kept,  it  is  as  good  as  metallic  money.  In  fact,  it  has  some 
advantages  over  metallic  money.  It  is  more  easily  trans- 
ported, less  bulky,  and  much  more  readily  transferred  from 
one  individual  to  another.  On  the  other  hand,  it  is  more 
easily  debased.  During  the  French  Revolution,  during  the 
American  Revolution,  in  the  Southern  states  during  the 
Civil  War,  and  during  the  recent  World  War,  paper  money 
was  issued  in  such  quantities  and  became  so  debased  that 
it  required  huge  sums  to  purchase  ordinary  commodities. 
Nevertheless,  if  paper  money  is  issued  and  guaranteed  by 
a  wisely  directed  government,  its  advantages  over  metallic 
money  are  so  great  as  to  render  it  far  more  desirable. 

In  the  United  States  there  are  several  kinds  of  paper 
money,  but  these  may  be  generally  grouped  under  two 
heads :  (1)  the  notes  of  the  national  banks  Kin^s  0j 
and  those  of  the  Federal  Reserve  banks,  and  Pop*  money. 
(2)  the  notes  and  certificates  of  the  Federal  government. 
The  national  bank  notes  and  the  Federal  Reserve  bank 
notes  are  bond-secured  notes,  that  is,  they  are  issued  with 
United  States,  bonds  as  security.  For  purposes  of  classifica- 
tion, the  national  banks  are  divided  into  three  groups,  — 
"  country  banks,"  reserve  city  banks,  and  central  reserve 
city  banks.  Each  one  of  these  is  required  by.  law  to  main- 
tain a  definite  reserve  amounting  to  a  fixed  percentage  of 
its  deposits.  The  paper  money  of  the  Federal  government 
is  also  of  several  kinds.  It  includes  gold  and  silver  cer- 
tificates, and  United  States  notes  or  "  Greenbacks  "  amount- 
ing to  about  $347,000,000.  These  notes  are  promises  to 
pay  on  demand  and  they  are  protected  by  a  reserve  fund 
of  the  Federal  government  which  is  supposed  to  be  sufficient 
to  meet  any  ordinary  demands.  Gold  and  silver  certificates 
are  redeemable  into  coin  at  any  time. 


344  American  Economic  Life 

Paper  money  may  take  the  extreme  form  of  fiat  money. 

It  is  sometimes  asserted  that  the  government  may  take 

paper,  stamp  it,  and  issue  it  as  money  to  be  ac- 

Fiat  money.  •       , 

cepted  as  legal  tender  in  payment  of  debt.  Such 
was  the  position  in  1876  of  the  Greenback  party  and,  in 
more  recent  years,  of  the  Populist  party.  The  fallacy  of  this 
proposition  ought  to  be  self-evident.  We  have  seen  that 
the  basis  of  the  stability  of  the  financial  system  of  the 
United  States  depends  upon  the  fact  that  all  forms  of  money 
are  interchangeable,  either  directly  or  indirectly,  with  gold. 
This  means  that  all  forms  of  money  are  maintained  at  a 
parity  with  gold,  and  such  could  not  be  the  case  were  un- 
limited quantities  of  paper  money  issued  without  regard 
to  the  gold  reserve.  Cheap  money  would  most  assuredly 
drive  out  dear  money,  and  prices  would  rise  by  leaps  and 
bounds.  The  recent  experience  of  European  countries 
in  the  World  War  testifies  to  the  truth  of  this  assertion. 
This  fact,  however,  must  not  be  construed  to  mean  that 
governments  may  not  issue  limited  quantities  of  paper 
money,  even  when  such  money  is  not  immediately  re- 
deemable in  coin. 

Quantity  of  Money.  —  It  will  be  observed  that  metallic 
money  is  spoken  of  as  a  commodity,  exactly  like  pears  or 
Prices  and  apples.  This  is  true,  because  money  is  merely 
values.  some  form  of  metal  which  is  as  much  an  economic 

good  as  oil  or  coal.  In  the  United  States,  it  represents 
gold.  Now  since  gold  is  a  commodity,  it  is  subject  to  the 
same  law  of  value  as  any  other  commodity.  That  is,  if  its 
supply  increases  in  a  greater  proportion  than  the  demand, 
its  value  will  decrease  correspondingly.  Under  these  cir- 
cumstances, therefore,  instead  of  pears  being  worth,  let  us 
say,  two  cents,  they  may  now  be  worth  three  cents ;  and 


Money  Problems  345 

the  prices  of  all  other  goods  will  rise  similarly,  because 
the  value  of  gold  (or  money)  has  fallen.  Conversely,  if 
the  supply*  of  gold  diminishes  as  compared  with  other 
goods,  the  prices  of  commodities  will  fall  because  the  value 
of  gold  has  risen.  Consequently,  a  general  rise  or  a  general 
fall  of  prices  is  possible.  On  the  other  hand,  there  can  be 
no  general  rise  or  general  fall  of  values,  because  value  repre- 
sents the  purchasing  power  of  a  commodity ;  that  is,  a  rela- 
tion between  two  commodities.  If,  therefore,  the  value  of 
one  of  these  goods  rises,  the  value  of  the  other  must  fall. 
If  a  pear  formerly  exchanged  for  two  apples,  and  now  ex- 
changes for  three,  the  value  of  the  one  has  increased  at  the 
expense  of  the  other.  Therefore,  there  can  be  no  general 
rise  or  fall  in  all  values. 

The  effect  of  the  volume  of  money  on  prices  is  well  illus- 
trated by  the  economic  consequences  of  the  World  War. 
This  war  resulted  in  a  tremendous  increase  in  Money  and 
the  amount  of  money  —  both  metallic  and  Prices- 
paper  —  in  circulation  in  this  country.  From  July  1,  1914, 
to  December  31,  1918,  the  value  of  gold  imports  into  the 
United  States  amounted  to  $1,767,900,000,  while  the  value 
of  the  gold  exports  from  this  country  amounted  to  $738,- 
900,000,  leaving  a  net  import  of  $1,029,000,000  in  gold. 
This  sum  did  not  take  into  account  the  gold  and  silver  al- 
ready in  circulation  in  the  country,  nor  the  large  issues  of 
Federal  Reserve  notes  that  took  place  during  that  period. 
Furthermore,  in  1920,  it  was  estimated  that  the  metallic 
money  alone  in  this  country  amounted  to  a  total  of  $3,200,- 
000,000,  of  which  $2,662,284,553  was  gold.  While  the 
country's  money  was  thus  increasing  at  this  rapid  rate, 
vast  quantities  of  goods  were  being  exported  abroad. 
Hence,  money,  because  of  its  plentifulness,  was  decreasing 


346  American  Economic  Life 

in  value;  while  goods,  because  of  their  scarcity,  were  in- 
creasing in  value.  Because  of  this  combination  of  circum- 
stances, prices  rose  to  an  almost  unprecedented  level. 

Fundamentally  prices  depend  upon  this  simple  relation 
between  money  and  goods.  Of  course  the  factor  of  credit, 
Money  and  which  will  be  discussed  in  the  next  chapter, 
goods.  must  also  be  taken  into  consideration,  as  well 

as  the  rapidity  with  which  money  circulates  in  the  com- 
munity. In  addition,  there  are  many  minor  and  contribut- 
ing causes  of  price  fluctuations,  such  as  extravagance, 
monopoly  power,  tariffs,  trusts,  trade  unions,  and  similar 
factors  in  our  economic  life.  But  the  fundamental  basis 
of  all  changes  in  price  level,  whether  upward  or  downward, 
lies  in  the  relation  between  the  quantity  of  money,  on  the 
one  hand,  and  the  quantity  of  goods  on  the  other.  When 
money  is  plentiful  and  goods  are  scarce,  prices  will  rise ; 
when  money  is  scarce  and  goods  are  plentiful,  prices  will 
fall.  In  the  United  States  the  rise  in  prices  following  the 
World  War  was  due  more,  perhaps,  to  the  increase  in  money 
and  credit  than  to  the  decrease  in  goods  available  for  home 
consumption. 

To  enjoy  normal  prices  it  is  necessary  to  establish  an 
equilibrium  between  money  and  goods.  Either  money  must 
The  decrease  in  quantity  and,  thereby,  increase  in 

outlook.  value ;  or  goods  must  increase  in  quantity  and, 
consequently,  fall  in  value.  This  may  be  brought  about 
through  increased  production,  or  through  the  medium  of 
international  trade,  which  will  be  discussed  in  a  succeeding 
chapter,  or  through  a  device  formulated  by  Professor  Irving 
Fisher  of  Yale  University.  Professor  Fisher  has  advocated 
the  prevention  of  great  price  fluctuations  through  the  process 
of  "  stabilizing  the  dollar."    According  to  his  plan,  the 


Money  Problems  347 

weight  of  the  dollar  would  be  virtually  increased  or  de- 
creased, from  time  to  time,  to  offset  the  fall  or  rise  in  the 
value  of  gold.  If  this  plan  is  found  practicable,  it  may 
prove  to  furnish  the  solution  of  this  constantly  recurring 
problem. 

QUESTIONS   FOR  RECITATION 

1.  Define  barter;  give  examples. 

2.  What  difficulties  of  a  system  of  barter  are  overcome  by  the 
use  of  money? 

3.  Why  is  money  necessary  to  civilized  communities? 

4.  Name  the  two  chief  functions  of  money ;  explain  each. 

5.  Explain  the  secondary  function  of  money.     Is  this  very  im- 
portant ? 

6.  Name  the  qualities  desirable  in  money.     Show  the  importance 
of  each. 

7.  Mention  different   things  that  have  been  used  as  money. 
Show  the  strength  and  weakness  of  each. 

8.  Why  do  gold  and  silver  make  the  best  money?    Does  the 
United  States  have  a  bimetallic  monetary  system  ? 

9.  What  was  the  purpose  of  the  Currency  Act  of  1900?    Why 
was  it  passed?     State  its  chief  provisions. 

10.  Explain  the  meaning  of  Gresham's  law. 

11.  What  is  paper  money?  Name  the  different  kinds  of  paper 
money  in  the  United  States. 

12.  Explain  the  meaning  of  fiat  money.  Why  is  it  ever  advo- 
cated ?    Do  you  believe  in  it  ? 

13.  Can  all  prices  rise?    Why?     Can  all  values  rise?    Why  not? 

14.  How  did  the  amount  of  money  in  the  United  States  increase 
during  the  World  War?  What  effect  did  this  increase  have  upon 
prices  ? 

15.  Why  should  an  increase  in  the  quantity  of  money  lower  its 
value  ?    Why  should  a  decrease  raise  its  value  ? 

16.  What  factor,  besides  money,  determines  prices?  How  did  the 
World  War  affect  this  other  factor  ?    What  was  the  consequence  ? 

17.  Explain  the  different  means  by  which  reduction  of  prices  is 
accomplished. 


348  American  Economic  Life 

PROBLEMS  FOR  DISCUSSION 

1.  Would  the  exchange  system  be  as  complex  as  it  is  to-day  if 
we  depended  mainly  upon  barter  ?    Why  not  ? 

2 .  What  would  be  the  effect  of  barter  upon  the  productive  system  ? 

3.  Why  does  the  man  on  the  street  exaggerate  the  importance  of 
money  ?     Show  its  true  significance  in  modern  life. 

4.  Would  the  following  make  good  money:  iron,  wheat,  dia- 
monds, glass  beads,  seashells,  beaver  skins?     If  not,  why  not? 

5.  Are  there  any  respects  in  which  gold  is  superior  as  money  to 
the  above  mentioned  commodities?  If  so,  explain  the  superiority 
in  each  case. 

6.  Contrast  the  relative  merits  of  gold  and  silver  as  money. 

7.  Why  are  copper  and  nickel  used  for  coins?  What  are  money 
"tokens"? 

8.  What  is  coinage?  What  is  the  difference  between  "free 
coinage"  and  "gratuitous  coinage"? 

9.  How  does  the  government  get  the  bullion  which  it  stamps 
into  coins? 

10.  Discuss  the  advantages  of  paper  money.     Its  dangers. 

11.  Explain  the  evils  of  irredeemable  paper  money. 

12.  Discuss  the  quantity  theory  of  the  value  of  money.- 

13.  Explain  clearly  the  difference  between  a  system  of  bimetallism 
and  a  single  standard  monetary  system. 

14.  How  would  Gresham's  law  operate  under  bimetallism? 

15.  Had  the  United  States  adopted  the  "free  silver"  idea  in  1896, 
how  would  prices  have  been  affected  ? 

16.  How  did  the  World  War  affect  prices  in  the  United  States? 
Why? 

SUPPLEMENTARY  READING 

Bullock,  C.  J.     Essays  in  the  Monetary  History  of  the  United  States. 
Ely,  R.  T.     Outlines  of  Economics,  Chap.  XIV. 
Fisher,  I.     The  Purchasing  Power  of  Money:  Stabilizing  the  Dollar. 
Johnson,  J.  F.     Money  and  Currency. 
Laughlin,  J.  L.     The  Principles  of  Money. 
Taussig,  F.  W.     Principles  of  Economics,  Book  III. 
World's  Work,  July,  1920.     "  The  Shrinking  Gold  Reserve,"  by  Theo- 
dore H.  Price. 


CHAPTER  XXXV 
Credit  and  Banking 

I.   Nature  of  credit 
i.   What  it  signifies 

2.  Individual  transactions : 

a.  Book  credit 

b.  Promissory  notes 

3.  Banking  operations : 

a.  Acceptance  of  checks 

b.  Bills  of  exchange 

c.  Issue  of  notes 

d.  Deposits  and  loans 

e.  Discount  of  notes 

4.  Advantages  of  credit 

5.  Preservation  of  credit 

II.   Banking  system  of  United  States 

1.  State  banks 

2.  The  National  Bank  Act : 

a.  Its  advantages 

b.  Its  defects 

3.  The  Federal  Reserve  Act: 

a.  Its  purpose 

b.  Its  provisions 

(1)  Federal  Reserve  Board 

(2)  Federal  Reserve  Banks 

(3)  Reserves  and  rediscounts 

(4)  Issue  of  notes 

(5)  Element  of  elasticity 

4.  The  conclusion 

Nature  of  Credit.  —  Civilized  communities  make  use  of 
another  instrument  of  exchange  known  as  credit.     Paper 

349 


350  American  Economic  Life 

money  is,  indeed,  a  form  of  credit ;  but  to-day  there  are 
many  other  kinds  of  credit  in  use.  In  fact,  so  general 
What  it  nas  the  use  of  credit  become  that  many  commer- 
signifies.  cjai  transactions  are  carried  on  without  the  use 
of  money  at  all.  Credit,  wherever  it  is  employed,  signifies 
confidence  in  business  relations.  It  may  be  utilized  not 
only  by  banks  and  corporations,  but  also  by  individuals. 
The  "  charge  and  send  "  of  the  modern  department  store  is 
one  of  the  most  widely  known  forms  of  individual  credit. 
In  a  primitive  community,  because  of  the  uncertainty  of 
the  future,  one  cannot  buy  goods  without  paying  for  them 
directly.  In  a  modern  stable  community,  however,  it  is 
perfectly  possible  to  buy  goods  "  on  credit."  Where  a 
man's  position  is  known,  his  ability  to  fulfill  his  financial 
obligations  is  so  well  understood  that  his  promise  to  meet 
them  at  the  proper  time  is  accepted  as  the  temporary 
equivalent  of  actual  payment. 

Credit  may  thus  be  employed  in  individual  transactions. 

In  fact,  to-day  book  credit  is  in  general  use  throughout  the 

United  States,  being  characteristic  of  the  small 

Individual  .         ° 

transac-  business  operations  of  the  corner  grocery  store 
tlons:  as  well  as  of  the  great  commercial  transactions 

of  the  modern  department  store.  In  the  pur- 
chase of  groceries,  for  example,  you  may  buy  goods  for  a 
whole  month  without  paying  a  single  cent ;  and,  at  the  end 
of  that  time,  the  grocer  sends  you  a  bill.  During  the  month, 
therefore,  you  have  been  receiving  goods  on  book  credit 
because  the  grocer  had  confidence  in  your  ability  to  pay  him. 
Likewise,  in  a  great  department  store,  hundreds  of  dollars' 
worth  of  goods  are  transferred  from  one  person  to  another 
without  the  direct  payment  of  money. 

In  the  same  manner  an  individual,  in  immediate  payment 


Credit  and  Banking  351 

of  an  obligation,  may  make  out  his  note  or  promise  to  pay  at 
the  end  of  a  specified  time.  For  example,  if  a  merchant 
is  short  of  present  funds  but  desires  to  make  Promissory 
an  immediate  purchase  of  goods,  he  gives  his  note  notes- 
for  sixty  days  in  payment  of  the  debt.  He  has  not  the 
money  now,  but  expects  to  have  it  in  the  near  future.  The 
manufacturer  of  whom  he  buys  the  goods  has  such  confi- 
dence in  the  merchant's  ability  to  pay  at  the  end  of  the  time 
specified  in  the  note  that  his  promise  is  taken  instead  of 
money. 

In  credit  transactions,  however,  banking  institutions  play 
by  far  the  most  important  part.  In  modern  society  the 
bank  is  a  credit  factory,  and  its  operations  in  Banking 
turn  depend  upon  the  existence  of  confidence  operations: 
in  business  relations.  Perhaps  two- thirds  of  all  Checks- 
business  transactions  are  accomplished  by  means  of  bank 
credit.  Take,  for  example,  the  enormous  volume  of  busi- 
ness negotiated  through  the  acceptance  and  cashing  of 
checks  by  the  banks.  A  check  is  an  order  on  a  bank  to  pay 
to  a  person  money  which  he  himself,  or  another,  has  on  de- 
posit in  that  bank.  A  lawyer,  for  example,  wishing  to  pay  his 
doctor's  bill,  does  not  give  him  actual  money,  but  sends  him 
a  check  for  the  required  amount.  The  physician  then  takes 
this  check  to  his  own  bank  (which  may  or  may  not  be  the 
same  as  that  of  the  lawyer)  and  either  has  it  cashed  or  de- 
posits it  to  his  own  credit.  The  lawyer  does  exactly  the 
same  thing  when  he  receives  a  check  from  the  physician 
in  payment  of  professional  services  he  has  rendered.  In 
case  the  lawyer  and  the  doctor  (and  hundreds  of  others  in 
like  positions)  have  accounts  at  different  institutions,  the 
banks  meet  together  in  a  "  clearing  house  "  and  there  settle 
whatever  differences  may  exist  between  them  by  reason  of 


352  American  Economic  Life 

the  varying  amounts  of  their  claims  on  each  other.  Through 
confidence  in  individuals  and  in  banking  institutions,  the 
use  of  checks  in  business  transactions  has  become  a  settled 
method  of  discharging  financial  obligations. 

The  bank  also  plays  an  important  part  in  business  trans- 
actions accomplished  by  means  of  bills  of  exchange,  which 
Bills  of  greatly  economize  the  use  of  money.  Such  a 
exchange.  bill  is  a  device  whereby  two  individuals  at  a 
great  distance  from  each  other  effect  a  payment  of  a  debt 
without  the  transfer  of  money  from  one  to  the  other.  Sup- 
pose, for  example,  a  New  York  importer  buys  goods  to  the 
value  of  $50,000  (or  £10,000)  from  a  London  exporter; 
and,  at  the  same  time,  a  New  York  exporter  sells  goods  of 
the  same  value  to  a  London  importer.  Instead  of  causing 
$50,000  to  be  transported  twice  across  the  Atlantic,  the 
bank  of  the  New  York  exporter,  to  whom  the  money  is 
due,  buys  from  this  exporter  a  bill  of  exchange  for  $50,000. 
The  New  York  importer  through  his  bank  buys  this  bill 
of  exchange  (which  constitutes  a  claim  on  the  London 
importer  for  £10,000),  indorses  it,  and  sends  it  to  the 
London  exporter  who,  in  turn,  presents  it  to  the  importer's 
bank  in  his  own  city  and  receives  the  £10,000  (or  $50,000) 
due  him  and  already  paid  to  the  bank  by  the  London  im- 
porter. In  this  manner,  by  means  of  banking  institutions 
and  a  bill  of  exchange,  all  four  men  have  been  satisfied 
without  the  necessity  of  transferring  large  sums  of  money 
across  the  water. 

The  issue  and  circulation  of  bank  notes  show  clearly  the 
confidence  of  the  public  in  banking  operations.  A  bank 
issue  of  note  is  simply  a  promise  to  pay  based  on  the 
notes.  resources   and   credit  of  a  banking  institution. 

If  the  bank's  resources  are  good,  its  notes  circulate  at  par. 


Credit  and  Banking  353 

Its  standing  in  the  community  rests  upon  the  confidence 
which  men  place  in  its  financial  integrity  and  in  its  obedience 
to  the  law.  In  the  United  States,  national  bank  notes  are 
issued  with  government  bonds  as  a  basis*  hence,  their 
value  is  practically  assured  and  no  one  hesitates  to  accept 
them. 

The  existence  of  confidence  in  banking  institutions  is 
also  seen  in  their  function  of  deposit.  People  deposit 
money  in  the  bank  for  the  purpose  of  saving  it,  Deposits 
or  for  the  purpose  of  drawing  checks  against  it.  and  loans- 
In  either  case  they  have  confidence  in  the  bank.  If  they 
deposit  for  the  purpose  of  saving,  the  bank  uses  the  money 
commercially.  It  makes  loans  to  industrial  enterprises, 
receives  interest  in  return,  and  then  pays  to  the  depositor 
a  part  of  the  interest  thus  received  for  the  money  used  in 
industry.  Banks  accept  check  accounts  because,  by  this 
means,  they  secure  the  use  of  surplus  money.  On  the 
other  hand,  the  depositor  opens  a  check  account  in  order 
to  pay  his  bills  through  bank  credit  without  the  interven- 
tion of  money  transactions.  The  deposits  are  safeguarded 
by  a  thorough  system  of  bank  inspection,  and  by  legal  re- 
quirements concerning  the  amount  of  specie  reserve. 

Another  leading  function  of  banks  is  the  discounting  of 
notes,  bills  of  exchange,  and  other  forms  of  commercial 
paper.  A  merchant  may  have  a  note  payable  Discount 
in  sixty  days  and  wish  to  realize  credit  on  this  °f notes- 
note  without  delay.  By  taking  it  to  the  bank,  he  secures, 
in  return  for  it,  money  or  credit  good  immediately.  Natu- 
rally, for  this  accommodation  he  pays  a  discount,  which  is 
one  of  the  chief  sources  of  revenue  to  banking  institutions. 
In  a  similar  manner,  banking  houses  discount  bills  of  ex- 
change. 


354  American  Economic  Life 

From  this  description  of  credit  and  credit  instruments,  it 
is  apparent  that  credit  is  one  of  the  most  important  factors 
Advantages  m  facilitating  modern  commercial  transactions, 
of  credit.  ^he  advantages  of  credit  instruments  may  be 
summarized  as  follows :  (i)  they  economize  the  use  of  pre- 
cious metals;  (2)  they  save  labor  in  the  transfer  of 
goods ;  (3)  through  deposits  in  banks,  small  savings  may 
be  amassed  in  large  sums  and  converted  into  capital ; 
(4)  through  banking  institutions,  large  sums  of  money  may 
be  secured  for  commercial  purposes  in  return  for  promises, 
made  under  certain  specifications,  to  pay  back  the  loans. 

On  the  other  hand,  credit,  when  improperly  employed, 
may  lead  to  extravagance  in  consumption  and  to  specula- 
its  preser-  tive  enterprises  in  production.  Its  great  peril 
vation.  js  inflation.     Nevertheless,  credit  is  one  of  the 

most  effective  tools  in  the  hands  of  modern  society.  Its 
value  is  fundamental ;  its  abuses  incidental.  Credit  repre- 
sents one  of  the  great  steps  in  the  advance  of  commercial 
development.  The  urgent  demand  at  the  present  time  is 
for  its  preservation  and  safeguarding.  Since  credit  is  so 
essential  to  modern  welfare  and  prosperity,  every  possible 
device  should  be  employed  to  insure  its  integrity.  Strin- 
gent legal  regulations  should  be  made  and  enforced  in  order 
to  prevent  that  too  extensive  use  of  credit  which  leads  to 
inflation  and  speculation. 

The  Banking  System  of  the  United  States.  —  Aside 
from  trust  companies  and  savings  banks,  the  functions  of 
state  which  may  be  inferred  from  their  titles,  bank- 

banks.  mg  institutions  in  the  United  States  are  grouped 

chiefly  under  two  heads,  (1)  state  banks  and  (2)  national 
banks.  The  first  of  these  operate  under  state  laws  and 
therein  lies  their  weakness.     In  early  days  lack  of  uniform- 


Credit  and  Banking  355 

ity  in  state  requirements  made  it  possible  for  banks  in  one 
state  to  operate  under  lax  conditions  not  tolerated  in  an- 
other state.  Hence  a  great  difference  arose  in  methods  of 
administration.  In  some  cases  reckless  and  dishonest 
management  resulted  in  altogether  inadequate  reserves, 
and  in  the  issue  of  almost  irredeemable  notes.  As  a  result 
frequent  panics  occurred,  like  those  of  1837  and  !857,  in 
which  few  state  banks  were  able  to  maintain  specie  pay- 
ment. 

In  1863  Congress  determined  to  remedy  this  situation 
and,  at  the  same  time,  to  meet  the  exigencies  of  Civil  War 
by  passing  the  National  Bank  Act  of  that  year. 
This  provided   for   a   new  system  of   national  National 
banks,  and  laid  down  the  rules  for  their  organi-  Bank  Act: 
zation,  management,  and  inspection.     By  laying  Vantages. 
a  prohibitory  tax  upon  the  issue  of  state  bank 
notes,  these  notes  were  driven  from  circulation  and  replaced 
by  national  bank  notes  which,  as  we  have  seen,  were  se- 
cured by  United  States  bonds  and  made  redeemable  on  de- 
mand.    By  requiring  each  bank  to  keep  on  hand  a  cash 
reserve  of  a  certain  percentage  of  its  deposits,  the  interests 
of  the  creditors  were  also  protected. 

While  this  act  marked  a  great  improvement  in  the  bank- 
ing system  of  the  United  States,  its  operation  proved  that 
there  was  not  sufficient  elasticity  in  our  currency 

.Its  defects. 

system.  Safety  was  provided  at  the  expense  of 
elasticity.  The  volume  of  currency  in  a  country  should 
contract  or  expand  according  to  the  decrease  or  increase  in 
the  volume  of  legitimate  commercial  transactions.  But 
the  very  uniformity  of  the  requirements  of  the  Act  of  1863 
prevented  this  contraction  and  expansion.  Furthermore, 
this  act  did  not  provide  sufficient  centralization  of  govern- 


356  American  Economic  Life 

mental  authority  over  the  entire  banking  system.  Some 
central  coordinating  authority  was  necessary  in  order  that 
the  national  banks  might  cooperate  with  one  another  in 
times  of  financial  stress. 

Accordingly,  in  December,  1913,  Congress  passed  the 
Federal  Reserve  Act.     This  act  attempts  (1)  to  provide 

the  machinery  whereby  a  national  bank  can,  at 
Reserve        any  given  moment,  provide  the  community  which 

it  serves  with  an  amount  of  currency  sufficient 

Its  purpose.  .  .   , 

to  meet  its  present  legitimate  needs ;  and  (2)  to 
provide  a  system  of  federal  supervision  whereby,  through 
proper  cooperation  of  the  banks  concerned,  every  bank  in 
the  system  will  be  enabled  to  meet  all  its  financial  obliga- 
tions, and  to  keep  its  promises  to  redeem  its  paper  dollars 
in  gold  when  presented  for  payment. 

To  accomplish  these  purposes,  the  Act  creates  a  Federal 
Reserve  Board  of  seven  members  made  up  of  the  Secretary 
its  pro-  of  the  Treasury,  the  Comptroller  of  the  Currency, 
visions.  anc[  £ve  other  members  appointed  by  the  Presi- 

dent. Of  these  last  five,  two  must  be  expert  bankers,  but 
are  not  permitted  to  have  banking  affiliations,  or  to  own 
bank  stock  during  their  term  of  service.  This  board 
exercises  final  control  over  the  operation  of  the  entire 
system.  It  can  force  one  regional  bank  to  loan  funds  to 
another  in  times  of  financial  stress  ;  it  can,  in  extraordinary 
circumstances,  suspend  the  restrictions  regarding  the  re- 
sources which  regional  banks  are  ordinarily  required  to 
hold ;  and  it  can,  when  necessary,  remove  directors  of  re- 
gional reserve  banks. 

For  purposes  of  administration  and  to  secure  a  more 
effective  handling  of  reserve  funds,  the  country  is  divided 
into  twelve  districts,  in  each  of  which  is  established  a  Fed- 


Credit  and  Banking  357 

eral  Reserve  Bank.  These  banks  are  purposely  scattered 
throughout  the  country  and  are  located  in  the  following 
Federal  Reserve  cities:  Boston,  New  York,  Philadelphia, 
Cleveland,  Richmond,  Atlanta,  Chicago,  St.  Louis,  Minne- 
apolis, Kansas  City,  Dallas,  and  San  Francisco.  The  capital 
of  a  Federal  Reserve  Bank  is  furnished  by  the  member- 
banks  in  each  district,  each  one  of  which  contributes  a 
sum  equal  to  six  per  cent  of  its  capital  and  surplus  combined. 
These  member-banks  are  composed  of  national  banks, 
which  are  compelled  to  join,  and  such  state  banks  which 
elect  to  join  the  Federal  Reserve  System,  by  bringing  their 
reserve  requirements  up  to  the  standard  set  for  national 
banks  and  by  submitting  to  national  examinations.  Each 
member-bank  keeps  part  of  its  funds  on  deposit  in  the 
Federal  Reserve  Bank  of  its  district.  The  Federal  Reserve 
Banks  have  been  called  "  bankers'  banks,"  because,  aside 
from  dealing  in  bills  of  exchange  in  the  open  market,  they 
do  not  make  loans  to  individuals  directly  and  do  not  accept 
individual  deposits. 

The  funds  of  reserves  from  member-banks,  together  with 
government  moneys,  make  up  the  deposits  of  the  Federal 
Reserve  Banks.  Each  of  these  regional  banks  is  required 
to  keep  a  reserve  of  thirty-five  per  cent  of  its  deposits,  be- 
sides a  forty  per  cent  gold  reserve  behind  the  issue  of  Federal 
Reserve  notes.  The  regional  or  Federal  Banks  may  re- 
discount —  that  is,  buy  at  a  discount  —  the  notes  and  other 
obligations  to  pay  money  held  by  the  member-banks  against 
individuals  who  have  borrowed  money,  properly  secured, 
from  these  local  banks.  That  is,  in  return  for  the  indorsed 
notes  of  the  member-bank,  the  Federal  Reserve  Bank  sends 
it  cash  or  money. 

Upon  the  security  of  the  rediscounted  paper,  or  in  ex- 


358  American  Economic  Life 

change  for  gold,  the  Federal  Reserve  Banks  may  issue 
Federal  Reserve  notes.  That  is,  in  the  exchange  described 
above,  the  member-banks  may  receive  the  required  cash 
in  the  form  of  Federal  Reserve  notes.  It  is  this  provision 
of  the  Federal  Reserve  Act  which  insures  elasticity  to  our 
currency  system.  The  regional  banks  may  also  issue  Fed- 
eral Reserve  bank  notes,  which  are  secured  by  government 
bonds  deposited  with  the  Treasury  Department,  in  the 
same  manner  as  national  bank  notes.  The  Act  intends, 
however,  that  the  national  bank  notes  will  be  ultimately 
retired. 

The  element  of  elasticity  in  our  currency  system  is  pro- 
vided chiefly  through  the  Federal  Reserve  notes  issued  on 
the  security  of  rediscounted  paper.  We  have  already  re- 
marked that  the  volume  of  currency  should  expand  or  con- 
tract with  the  volume  of  commercial  transactions.  Now, 
when  business  is  brisk,  the  local  banks  will  be  lending  large 
sums  of  money  based  on  the  personal  notes  of  business 
men.  These  notes  will  then  be  rediscounted,  that  is,  ex- 
changed for  Federal  Reserve  notes,  which  will  then  come 
into  circulation  as  money.  The  more  active  business  be- 
comes, the  greater  will  be  the  volume  of  currency.  When 
business  is  slack,  however,  the  local  banks  will  cease  so 
much  lending,  rediscounting  will  stop,  and  the  volume  of 
currency  will  not  be  further  enlarged.  Thus,  theoretically, 
the  supply  of  money  becomes  automatically  adjusted  to  the 
demand  for  it. 

The  Federal  Reserve  system  has  thus  materially  im- 
proved the  banking  system  of  the  United  States.  If  there 
The  is  anv  weakness  to  be  feared  in  this  system,  it  lies 

conclusion.  m  ^e  ease  w[^  which  bank  credit  may  be  ex- 
panded and  the  difficulty  with  which  it  may  be  contracted. 


Credit  and  Banking  359 

In  other  words,  the  danger  of  this  system  lies  in  inflation 
and  high  prices.  During  the  World  War,  the  volume  of 
currency  was  expanded  in  accordance  with  national  needs ; 
but,  in  the  period  immediately  following  the  war,  the  coun- 
try suffered  from  too  much  credit  inflation.  In  fact,  in 
1920,  there  were  $3,000,000,000  of  Federal  Reserve  notes 
in  circulation.  For  the  entire  success  of  this  system,  it 
is  necessary  to  bring  about  a  more  speedy  contraction  of 
bank  credit  when  the  necessity  for  expansion  has  ceased. 
The  Reserve  Act,  however,  provides  the  basis  for  this  con- 
traction in  two  ways.  In  the  first  place,  no  Federal  Re- 
serve Bank  may  reissue  the  notes  of  another  such  bank, 
but  must  return  them  "  for  credit  or  redemption  "  to  the 
bank  issuing  them.  In  this  respect,  therefore,  contraction 
will  depend  upon  the  rapidity  with  which  such  notes  find 
their  way  back  to  a  Federal  Reserve  Bank.  In  the 
second  place,  bank  credit  may  be  checked  by  increasing 
the  rates  charged  by  the  Federal  Reserve  Banks  for  redis- 
counting  the  notes  of  the  member-banks.  By  making  it 
less  profitable  for  the  local  banks  to  lend  money  to  individual 
business  men,  speculative  enterprises  may  be  discouraged. 
In  November,  1919,  a  year  after  the  close  of  the  World  War, 
the  Federal  Reserve  Board  began  to  exercise  its  powers  in 
this  direction  by  increasing  the  rediscount  rates,  and  by 
enforcing  the  regulations  concerning  the  normal  reserves. 

QUESTIONS  FOR  RECITATION 

1.  Define  credit;  give  an  example. 

2.  Explain  the  meaning  of  book  credit. 

3.  What  is  a  promissory  note?    What  is  a  check?    What  con- 
nection has  the  bank  with  either  or  both  of  these  ? 

4.  Explain  just  exactly  what  a  bank  is. 


360  American  Economic  Life 

5.  Explain  clearly  the  function  of  a  bill  of  exchange.     Show 
how  the  bank  enters  into  this  transaction.     Why  does  it  do  this  ? 

6.  Explain  how  banks  are  able  to  issue  notes. 

7.  Why  do   banks   accept   deposits   and  make  loans?     How  is 
this  advantageous  to  all  concerned  ? 

8.  Why  do  banks  discount  notes  ? 

9.  Summarize  the  advantages  of  bank  credit. 

10.  May  any  evils  result  from  the  use  of  credit?     How  may 
they  be  remedied  ? 

11.  Why  did  state  banks  prove  dangerous  in  the  early  history 
of  our  country  ? 

12.  What  are  national  banks?     Show  their  advantages  over  state 
banks. 

13.  Why  was  the  Federal  Reserve  Act  of  19 13  passed?     State 
its  main  purposes. 

14.  Are  all  national  banks  part  of  the  Federal  Reserve  System? 
Are  all  state  banks  ? 

15.  How  many  Federal  Reserve  Banks  are  there?     Where  are 
they  located?     Why  are  they  called  "bankers'  banks"? 

16.  Outline  the  provisions  of  the  Federal  Reserve  Act. 

17.  Explain  a  weakness  in  the  Federal  Reserve  system.    How 
may  it  be  remedied  ? 

PROBLEMS   FOR  DISCUSSION 

1.  Discuss  the  effect   of   credit   upon   the  productiveness   and 
accumulation  of  capital. 

2.  Explain  the  difference  between  individual  credit  transactions 
and  banking  operations. 

3.  Discuss  the  importance  of  the  bank  to  the  community;   de- 
scribe its  chief  functions. 

4.  Contrast  trust  companies,  savings  banks,  state  banks,  and 
national  banks. 

5.  What  is  the  difference  between  a  national  bank  note  and  a 
government  bond  ?     Should  the  latter  circulate  as  money  ? 

6.  How  are  bank  deposits  protected?    How  are  bank  notes 
protected? 

7.  Explain  what  is  meant  by  "wildcat"  banks. 


Credit  and  Banking  361 

8.  How  has  the  United  States  prevented  the  issue  of  state  bank 
notes?    Why? 

9.  Why  do  national  bank  notes  circulate  at  par?    How  is  their 
value  guaranteed  ? 

10.  What  was  the  chief  defect  of  the  National  Bank  Act  of  1863? 
When  and  how  was  this  remedied  ? 

11.  Discuss  the  functions  of  the  Federal  Reserve  Board. 

12.  Explain  the  difference  between  the  Federal  Reserve  Bank 
and  the  member-banks.  Explain  the  relations  existing  between 
them. 

13.  Explain  how  notes  are  rediscounted  by  Federal  Reserve 
Banks. 

14.  What  are  Federal  Reserve  notes?  Under  what  conditions 
are  they  issued  ?     How  is  their  value  guaranteed  ? 

15.  What  are  Federal  Reserve  bank  notes?  What  guarantees 
their  value  ? 

16.  What  is  the  effect  of  the  issue  of  Federal  Reserve  notes? 
What  may  be  the  final  result  ? 

17.  How  may  bank  credit  be  contracted,  when  once  inflated? 


SUPPLEMENTARY   READING 

Bagehot,  W.     Lombard  Street,  Chap.  II. 

Carver,  T.  N.     Principles  of  Political  Economy,  Chap.  XXV. 

Clay,  H.    Economics,  Chap.  X. 

Cleveland,  F.  A.     Funds  and  Their  Uses. 

Dunbar,  C.  F.     Theory  and  History  of  Banking,  pp.  1-94,  158-190. 

Scott,  W.  A.     Money  and  Banking,  Chaps.  I-VI,  XIV,  XV. 

White,  H.     Money  and  Banking,  Book  II,  Book  III,  Chaps.  I-XIV. 

Willis,  H.  P.     The  Federal  Reserve  System. 


CHAPTER  XXXVI 
Modern  Finance 

I.  Evolution  of  finance 

i.   Importance  of  funds 
2.   How  secured: 

a.  At  first 

b.  At  the  present  time  : 

(i)  Through  corporations 
(2)  Through  "  trust  finance" 

II.  How  companies  are  formed 

1 .  A  slate  company  : 

a.  The  "  promoter  "  : 

(1)  His  first  steps 

(2)  His  later  activities 

b.  The  company  organized : 

(1)  How  accomplished 

(2)  How  stocks  are  "floated" 

2.  United  States  Steel  Corporation : 

a.  How  formed 

b.  Its  capitalization 

III.   Results  of  modern  finance 

1.  Chief  advantages 

2.  A  great  danger 

3.  Other  evils 

4.  Conclusion 

Evolution  of  Finance.  —  The  latest  development  of 
credit  as  applied  to  industry  appears  in  the  financing  of 
great  business  concerns.  Credit  is  intimately  connected 
with  modern  finance  because,  by  means  of  it,  the  business 

.   362 


Modem  Finance  363 

world  is  able  to  secure  large  sums  of  money  with  which  to 
finance  its  propositions.  To  carry  on  any  business  what- 
soever funds  in  some  form  are  essential,  because  importance 
they  are  needed  to  procure  the  necessary  land,  of  funds, 
labor,  and  capital.  Without  funds,  natural  resources  lie 
idle,  labor  is  unemployed,  and  capital  waits  for  invest- 
ment. The  procuring  of  these  funds  constitutes  one  of  the 
chief  duties  of  the  business  organizer. 

To  understand  the  origin  of  modern  finance,  it  is  neces- 
sary briefly   to  recapitulate   the  manner  in  which  vast 
funds  have  been  accumulated  in  this  country.  Howse. 
In  the  early  part  of   the  nineteenth  century,  cured: 
business  was  conducted  largely  on  an  individual,   A*first- 
or  partnership,  basis.     One  man,  with  a  small  amount  of 
capital,  went  into  business  for  himself.     Or,  if  he  did  not 
have  sufficient  funds,  he  went  into  partnership  with  two 
or  three  of  his  friends  who  entered  into  a  mutual  agreement 
and  helped  in  the  business  management. 

This  simple  method  of  securing  funds,  proving  inadequate 
for  the  demands  of  modern  business,  was  succeeded  by  the 
corporation,  which  possesses  so  many  advan- 
tages over  the  partnership  method  of  procuring 
capital  that  it  has  completely  revolutionized  the  system 
of  business  finance.  From  the  standpoint  of  funds,  the 
greatest  advantage  of  the  corporation  method  of  doing 
business  lies  in  the  power  of  the  board  of  directors  to  issue 
securities  for  providing  the  funds  necessary  to  productive 
enterprises.  These  securities  may  be  in  the  form  of  stocks 
or  bonds.  Stocks  are  certificates  of  investment  upon 
which  annual  dividends  are  declared.  Bonds  are  certifi- 
cates of  indebtedness  which  bear  a  definite  rate  of  in- 
terest.    The  former  represent  invested  wealth ;   the  latter, 


364  American  Economic  Life 

debts  or  obligations  which  must  be  ultimately  discharged. 
Because  immense  funds  for  business  undertakings  are 
secured  through  these  two  means,  the  corporation  idea 
marks  a  great  advance  in  the  development  of  modern 
finance. 

The  next  step  in  the  evolution  of  finance  was  brought 
about  by  the  development  of  large  scale  production  and  the 
invention  of  that  form  of  business  organization  known  as 
the  trust.  Although  the  board  of  trustees  (from  which 
body  we  get  the  name  "  trust  ")  has  been  declared  illegal, 
its  essential  feature  —  the  centralization  of  capital  and 
business  control  —  still  exists  in  the  form  of  the  holding 
company.  Instead  of  appointing  a  board  of  trustees  which 
holds  stock  of  other  companies,  the  organizers  of  the  trust 
form  a  new  corporation.  Here  is  the  opportunity  of  amass- 
ing colossal  sums  of  capital,  and  of  having  these  enormous 
funds  managed  by  central  control.  To  bring  about  these 
results,  questionable  methods  have  often  been  employed 
and  have  given  rise  to  the  phrase  "  high  finance."  But 
"  high  finance  "  should  not  be  confused  with  that  legiti- 
mate "  trust  finance  "  which  secures  funds  through  per- 
fected and  advantageous  business  organization. 

How  Companies  Are  Formed.  —  To  realize  more  clearly 
the  nature  of  this  kind  of  finance,  let  us  examine  the  usual 
A  slate  method   of   organizing   an  industrial   company, 

company.  Comparatively  few  people  really  understand 
the  procedure  involved  in  converting  a  business  propo- 
sition into  marketable  securities  through  the  medium  of 
modern  finance.  Suppose  in  a  region  fifty  miles  square 
there  is  located  a  group  of  slate  quarries  capable  of  pro- 
ducing the  only  slate  in  the  neighborhood.  Here  is  a 
natural  resource,  furnishing  an  excellent  basis  for  a  com- 


Modem  Finance  365 

bination  of  interests,   and  requiring  only  that  sufficient 
funds  be  secured  for  its  development. 

Looking  over  this  field,  the  "  promoter  "  —  the  man 
who  organizes  and  directs  combinations  of  capital  —  plans 
a  definite  proposition.  After  careful  con-  The "  pro- 
sideration  of  all  aspects  of  the  question,  he  moierr 
concludes  that  it  is  possible  to  form  a  combination  to 
control  slate  production  in  this  region.  He  first  goes  to 
the  bankers  who  in  the  past  have  assisted  him  in  financing 
his  enterprises,  explains  the  situation  to  them,  and  asks 
for  their  cooperation.  If  they  have  confidence  in  the  pro- 
moter, and  if  the  undertaking  appears  profitable,  they  agree, 
in  the  event  of  the  proposition  proving  desirable,  to  render 
him  any  necessary  financial  assistance. 

Having  thus  secured  this  backing,  the  promoter,  or  his 
representative,  proceeds  into  the  slate  region,  and  goes  from 
quarry  to  quarry  buying  up  options.  That  is,  he  secures 
for,  perhaps,  one  thousand  dollars  the  right  to  purchase 
for  a  stated  sum  a  slate  quarry  at  any  time  before  the  end 
of  two  years.  If  the  promotion  is  successful,  the  promoter 
returns  after  a  few  months  to  his  banking  house  and 
states  that  he  has  secured  options  on  all  the  properties. 
He  also  makes  a  report  concerning  their  capacity,  the  quality 
of  their  product,  the  possibility  of  their  development,  and 
the  prospect  of  effecting  economies. 

If,  at  this  stage,  the  proposition  looks  unfavorable,  it  is 
dropped.     If,   however,   it   seems   feasible   to   organize   a 
successful   company,    a   charter   is   applied   for 
and    the    company    incorporated;     stocks    and  company 
bonds  are  issued  by  it ;   and  the  options  on  the  orgamzed- 
various    slate    properties    are    taken    up.     Perhaps    these 
stocks  and  bonds  are  given  to   the  owners  of  the  slate 


366  American  Economic  Life 

quarries  in  return  for  their  properties.  It  may  be,  how- 
ever, that  the  owners  insist  on  cash  payment.  In  this 
case,  the  stocks  and  bonds  are  taken  by  the  banking  house 
and  "  floated."  This  is  done  by  the  agents  of  the  banking 
house  traveling  over  the  country,  visiting  financial  in- 
stitutions, trust  companies,  or  individuals  likely  to  buy 
such  securities  and  offering  for  sale  those  of  the  newly 
organized  company. 

These  securities  may  be  listed  on  one  or  more  stock  ex- 
changes. In  that  case,  they  are  sold  to  the  general  public, 
if  people  choose  to  buy  them  in  the  usual  way.  By  what- 
ever method  the  promoter  and  his  bank  proceed,  however, 
the  ultimate  aim  of  the  company  is  to  selJ  the  securities  to 
the  public,  organize  the  business  on  an  efficient  basis,  and 
make  it  pay  dividends  on  the  securities  issued.  If  the 
promoter  has  used  good  judgment,  and  if  the  company  is 
not  overcapitalized,  the  new  corporation  has  a  good  chance 
of  success.  Confidence  on  the  part  of  investors,  as  well  as 
honesty  on  the  part  of  the  company,  is  absolutely  essential 
to  the  process  of  successful  promotion. 

This  description  of  the  organization  of  a  hypothetical 
company  to  control  the  slate  business  in  a  given  locality 
United  ^as  keen  paralleled  a  hundred  times  in  the  course 

states  of    the    last    forty    years.     The    organization 

Corporation:  of  the  United  States  Steel  Corporation  was,  in 
How  a  large  way,  an  almost  exact  duplicate  of  the 

formed.  gjate  qUarry  example,  except  that  the  proposition 

to  consolidate  the  steel  interests  was  most  welcome  to  the 
steel  manufacturers  themselves.  Competition  had  been 
very  severe.  Numerous  small  trusts  had  been  formed. 
The  Morgan  interests,  well  acquainted  with  this  situation, 
undertook  to  '  organize  a  combination  of  all  of  the  in- 


Modern  Finance  367 

dependent  producers.  Gradually  the  principal  companies 
were  consolidated,  with  the  exception  of  the  Carnegie  Steel 
Company,  which  at  first  refused  to  combine.  In  reply 
to  the  trust's  threats,  the  late  Mr.  Carnegie  proposed  to 
erect  a  steel  plant  on  Lake  Erie  which  would  produce  steel 
rails  more  cheaply  than  any  plant  the  trust  then  owned. 
Eventually,  however,  the  Carnegie  plant  was  bought  out 
at  Carnegie's  own  price,  approximately  $400,000,000. 

At  its  inception,  the  steel  trust-  was  overcapitalized, 
because  of  the  enormous  prices  which  some  of  the  con- 
solidating firms  received  for  their  plants,  and  Its  Capitd- 
because  of  the  great  bonuses  secured  by  the  ization- 
promoters.  However,  the  reconstruction  of  the  plant  and 
the  purchase  of  the  Tennessee  Coal  and  Iron  Company 
in  1907  established  the  trust  on  a  strong  basis.  This, 
together  with  the  reorganization  of  steel  manufacturing, 
which  the  steel  trust  has  effected,  renders  it  very  probable 
that  at  the  present  time  the  total  capitalization  of  the  trust 
(about  two  billion  dollars)  represents  something  like  actual 
value. 

Results  of  Modern  Finance.  —  The  advantages  of  mod- 
ern finance  are  twofold.  In  the  first  place,  the  corpo- 
ration, as  financed  by  the  modern  banker,  gives  chief 
the  aggressive  business  man  an  opportunity  to  advant*ges. 
secure  large  funds  of  capital.  At  the  same  time,  the  small 
investor  is  enabled  to  invest  sums  of  capital  in  a  large 
progressive  business  and  thus  becomes  a  participant  in  a 
successful  enterprise.  Neither  of  these  transactions  would 
be  possible  without  the  institution  of  credit.  Stocks  and 
bonds,  which  together  form  one  of  the  most  important 
kinds  of  credit  instruments  in  modern  industry,  furnish  a 
common  basis  for  the  small  investor  and  the  large  indus- 


368  American  Economic  Life 

trial  enterpriser.  Of  course,  the  savings  bank  may  occa- 
sionally intervene  between  these  two ;  but,  neverthe- 
less, they  finally  come  together  through  the  medium  of 
securities. 

Financial  methods,  as  employed  by  the  holding  company 
of  to-day,  have  wrought  wonderful  changes  in  our  financial 
A  great  and   industrial    system.     Fifty   years    ago,    the 

danger.  Steel  Trust  would  have  been  considered  an  im- 

possibility, because  it. was  generally  believed  that  no  single 
business  concern  could  finance  and  manage  so  large  an 
enterprise.  Gradually,  however,  men  learned  how  to 
integrate  individual  industries.  This  was  considered,  and 
rightly  so,  a  wonderful  achievement.  It  was  followed, 
however,  by  the  development  of  financial  centralization, 
which  permitted  one  management  to  control  several 
integrated  industries.  By  means  of  this  financial  control, 
it  was  quite  possible,  at  one  time,  for  effective  power  over 
our  greatest  industrial  corporations  to  be  centered  in  the 
hands  of  a  half  dozen  powerful  financiers.  To  check  this 
centralizing  tendency  in  our  financial  life,  Congress  in 
1914  passed  the  Clayton  Anti-trust  Act.  This  act  aims 
to  prevent  financial  centralization  by  prohibiting  "  inter- 
locking directorates" ;  that  is,  by  making  it  illegal  for  an 
individual  to  serve  as  a  director  of  two  or  more  industrial 
corporations  doing  an  interstate  business,  if  one  of  these 
has  a  capital  of  over  $1,000,000,  and  if  such  corporations 
are  natural  competitors. 

Other  evils  are  incident  to  the  system  of  modern  finance. 
Chief  among  these  are  overcapitalization,  "  stock  watering," 
other  and   public   deception    regarding    the   value   of 

evils.  securities.     Overcapitalization  naturally  follows 

from  the  process  of  "  stock  watering."     This  results  from 


Modern  Finance  369 

the  fact  that  the  par  value  of  the  stock  does  not  represent 
its  real  value.  The  difference  between  these  two  values  is 
the  "  water  "  in  the  stock.  It  can  readily  be  seen  what 
injury  is  done  to  good  business  management,  and  therefore 
to  the  community,  when  attempts  are  made  to  pay  divi- 
dends on  an  amount  of  wealth  larger  than  that  which  is 
actually  engaged  in  productive  enterprise.  Paper  values 
are  not  real  values.  The  tragedy  of  the  New  York,  New 
Haven  and  Hartford  Railroad  Company  bears  eloquent 
witness  to  the  fatal  consequences  of  reckless  financiering. 
Every  effort  should,  therefore,  be  made  to  preserve  the 
legitimate  character  of  modern  finance.  Finance  is  a 
development  of  credit  and  depends  upon  credit  The 
for  accomplishing  its  purpose.  No  sanction  c°ncl«slon- 
should  be  given  the  methods  of  those  financiers  who,  by 
their  misrepresentations,  serve  to  weaken  public  confidence. 
Their  acts  should  be  rigidly  scrutinized  and  a  sharp  dis- 
tinction drawn  between  legitimate  and  illegitimate  financier- 
ing. Social  welfare  is  largely  dependent  upon  the  mainte- 
nance of  a  high  standard  of  integrity  in  the  development  of 
modern  financial  methods.  Therefore,  stringent  laws  should 
be  passed  to  check  reckless  financiering,  to  supervise  the 
issuance  of  securities,  to  prevent  overcapitalization  of 
corporations,  and  to  protect,  in  whatever  manner  necessary, 
the  rightful  interests  of  the  investor. 

QUESTIONS  FOR  RECITATION 

1 .  Explain  the  importance  of  funds  to  society. 

2.  Trace  the  evolution  of  finance  from  the  days  of  the  single  em- 
ployer to  the  rise  of  the  trusts. 

3.  Define  stocks  and  bonds.     Explain  the  difference  between 
them. 


370  American  Economic  Life 

4.  How  do  corporations  secure  funds  ? 

5.  What  are  the  duties  of  a  promoter? 

6.  Explain  clearly  how  a  new  company  is  organized,  and  its 
securities  put  upon  the  market. 

7.  Who  organized  the  United  States  Steel  Corporation?  How 
was  it  done  ? 

8.  Why  was  the  United  States  Steel  Corporation  able  to  suc- 
ceed, while  the  New  York,  New  Haven  and  Hartford  Railroad  Com- 
pany failed? 

9.  Describe  the  great  benefits  of  modern  finance. 

10.  What  great  danger  at  one  time  threatened  the  financial  life  of 
America  ?     How  has  it  been  averted  ? 

11.  Explain  the  meaning  of  "stock  watering"  and  overcapitaliza- 
tion.    Why  are  they  resorted  to  ? 

12.  How  may  the  interests  of  investors  be  properly  protected? 

PROBLEMS  FOR  DISCUSSION 

1.  Is  money  the  only  form  of  funds  ?    Name  some  others. 

2.  Explain  how  funds  are  raised  by  modern  business  men. 

3.  Could  you  go  to  a  bank  to-day  and  raise  funds  for  financing 
you  through  the  university  ?    Why  not  ? 

4.  When  a  trust  is  organized,  how  are  the  necessary  funds  raised 
for  purchasing  the  stock  of  the  underlying  companies  ? 

5.  Explain  the  steps  by  which  a  trust  is  organized. 

6.  What  is  meant  by  the  "capitalization"  of  a  trust? 

7.  On  what  bases  may  the  amount  of  capitalization  be  deter- 
mined ? 

8.  Why  are  some  doubtful  companies  ultimately  successful, 
and  why  do  others  of  like  character  fail? 

9.  Could  large  scale  production  be  carried  on  without  modern 
methods  of  financiering? 

10.  Does   "stock  watering"  harm  the  public?    The  investor? 
Why? 

11.  What  are  "blue  sky"  laws?    Why  are  they  passed? 

12.  What  good  has  the  modern  financier  accomplished?    What 
harm  has  he  sometimes  done  ? 


Modern  Finance  371 

SUPPLEMENTARY  READING 

Carver,  T.  N.     Principles  of  Political  Economy,  Chap.  XXVII. 

Cleveland,  F.  A.     Funds  and  Their  Uses. 

Dewing,  A.  S.     Corporate  Promotions  and  Reorganizations. 

Federal  Trade  Commission.     Annual  and  Special  Reports. 

Lyon,  W.  H.     Capitalization. 

Meade,  E.  S.     Trust  Finance;  Corporation  Finance. 

Smith,  J.  R.    Story  of  Iron  and  Steel. 

Tarbell,  I.  M.     History  of  the  Standard  Oil  Company. 


CHAPTER  XXXVII 

International  Trade 

I.    The  underlying  principles 
i.   Why  men  trade 

2.  How  trade  developed 

3.  Foreign  trade : 

a.  Its  primary  basis 

b.  The  disturbing  factors : 

(1)  Nationalism 

(2)  Commercial  expansion 

(3)  Overproduction 

c.  American  foreign  trade  : 

(1)  Chief  exports  and  imports 

(2)  Balance  of  trade 

II.    General  features  of  foreign  trade 

1 .  Its  characteristics  : 

a.  World  markets 

b.  Standard  prices 

c.  Method  of  payment : 

(1)  Bills  of  exchange 

(2)  Rate  of  exchange 

2.  How  it  is  restricted  : 

a.  Chief  kinds  of  restrictions 

b.  Protection : 

(1)  Its  purpose 

(2)  Its  advantages 

(3)  Its  disadvantages 

c.  Free  trade : 

(1)  Its  benefits 

(2)  Its  defect 

d.  The  conclusion 

372 


International  Trade  373 

Of  the  various  problems  that  arise  in  a  discussion  of 
the  exchange  of  wealth,  none  is  more  important  than  the 
trade  relations  of  civilized  communities.  In  fact,  foreign 
trade  is  inseparably  connected  with  modern  industrial 
life. 

The  Underlying  Principles.  —  It  seems  a  truism  to  say 
that,  in  the  present  stage  of  the  world's  economic  develop- 
ment, an  individual  cannot  produce  a  sufficient  why  men 
variety  of  economic  goods  to  satisfy  his  manifold  trade- 
wants.  Yet  this  fact  is  at  the  basis  of  all  trade.  This  is 
an  age  of  specialization  in  production  and  of  minute 
subdivision  in  labor.  For  example,  one  man  or  a  group  of 
men  produces  nothing  but  woolen  goods ;  another  confines 
his  attention  exclusively  to  the  production  of  foodstuffs ; 
while  a  third  concentrates  all  his  time  and  effort  upon  the 
construction  of  building  materials.  If  each  man,  therefore, 
consumed  only  what  he  produced,  many  of  his  wants  would 
remain  unsatisfied.  He  must  consequently  trade  with  his 
fellow  men  and  secure  from  them,  in  exchange  for  the 
results  of  his  own  labor,  the  commodities  which  they 
produce  that  are  essential  to  his  happiness*.  In  modern 
communities,  individual  and  social  welfare  is  absolutely 
conditioned  upon  the  free  interchange  of  commodities. 

In  primitive  societies,  this  problem  of  exchange  was 
comparatively  insignificant.  Every  individual  produced, 
in  some  fashion,  all  that  was  absolutely  needed  to  How  trade 
sustain  life,  and,  his  wants  being  few  and  un-  devel°Ped- 
developed,  he  was  not  dependent  upon  the  labor  of  his 
fellow  man.  To-day,  however,  the  trade  relations  of  so- 
ciety have  developed  to  such  an  extent  that  nations  war 
upon  each  other  in  order  to  secure  the  benefits  accruing 
from  wider  trade  relationships.     Beginning  with  insignifi- 


374  American  Economic.  Life 

cant  local  exchanges,  the  sphere  of  trade  gradually  widened 
until  it  extended  to  a  free  interchange  of  commodities 
produced  within  the  same  country.  Thus  domestic  trade 
was  established.  But,  as  the  facilities  for  transportation 
developed,  a  nation's  trade  expanded  beyond  the  confines 
of  its  own  borders,  until  domestic  trade  was  supplemented 
by  foreign  trade.  In  this  way,  there  was  inaugurated 
international  trade  which  now  plays  such  an  important 
part  in  the  life  of  all  great  commercial  nations.  In  fact, 
the  existence  of  nations  sometimes  depends  upon  the 
preservation  of  their  international  trade.  Should  England, 
for  example,  be  cut  off  from  her  trade  connections  with  the 
rest  of  the  world,  her  people  would  suffer  severely  from  the 
curtailment  of  the  food  supply  and  many  raw  materials 
of  industry. 

The    underlying    economic    principle    of    international 
trade    arises   primarily   from    the   varying   conditions   of 
production,  and  from  the  fact  that  certain  parts 
trade:  of  the  world  are  geographically  fitted  for  the 

its  primary  production  of  particular  commodities.  For 
example,  coffee  grows  well  in  Brazil ;  tea  is  cul- 
tivated in  China;  and  cotton  is  cheaply  grown  in  the 
southern  part  of  the  United  States.  In  a  similar  manner, 
Canada,  the  United  States,  South  Africa,  and  Australia 
easily  produce  wheat;  while  northwestern  Europe,  by 
reason  of  its  mineral  deposits,  is  peculiarly  suited  to  manu- 
facturing. Thus,  each  of  these  areas  has  a  specialty  for 
which  it  might  well  seem  that  nature  intended  it.  This 
local  fitness  for  production,  due  to  favorable  physical 
conditions,  is  the  primary  basis  for  international  trade. 
To-day,  in  spite  of  strong  national  prejudices,  this  principle 
of  international  exchange  asserts  itself. 


International  Trade  375 

The  chief  barrier  against  the  free  interchange  of  commod- 
ities among  nations,  each  one  of  which  is  especially 
fitted  for  the  production  of  particular  goods, 
lies  in  this  feeling  of  national  solidarity.  So  disturbing 
long  as  the  world  is  organized  along  the  lines  of  factors- 
nationalism,  no  rigid  and  absolute  specialization  in  pro- 
duction is  probable.  That  is,  every  nation,  as  a  matter  of 
political  policy,  will  attempt  to  produce,  or  in  some  manner 
to  command,  the  goods  essential  to  its  continued  national 
independence.  In  addition  to  the  influence  of  national 
solidarity,  two  other  factors  interfere  with  the  full  utili- 
zation of  the  physical  basis  for  international  trade.  In  the 
first  place,  a  commercially  expanding  nation  with  large 
resources  and  limited  markets  aims  to  secure  additional 
trade  in  spite  of  the  law  of  local  fitness.  For  this  reason, 
although  northwestern  Europe  is  peculiarly  suited  to 
manufacturing,  many  large  American  trusts  enter  Euro- 
pean markets  and,  notwithstanding  the  extra  cost  of  trans- 
portation, sell  their  goods  at  a  profit  in  these  markets.  In 
the  second  place,  surplus  products  are  often  "  dumped  " 
in  a  foreign  market.  That  is,  when  a  manufacturer  finds 
that  he  has  produced  more  goods  than  can  be  sold  at  home, 
he  sells  them  abroad  at  greatly  reduced  prices.  In  all 
these  cases,  the  principle  of  local  fitness  has  been  violated. 

In  order  to  ascertain  whether  this  principle  is  generally 
observed  in  American  foreign  trade,  let  us  examine  the 
character  of  American  exports  and  imports.    Al- 

x  x  A  mertcan 

though  the  amount  of  manufactured  goods  which  foreign 
the  United  States  exports  is  gradually  increasing,  tra   ' 
agricultural  products  have  always  made  up  the  bulk  of 
our  exports.     Chief  among  these  exports  are  cotton,  meat 
and  dairy  products,  iron  and  steel  manufactures,  bread- 


376  American  Economic  Life 

stuffs,  copper  and  its  products,  mineral  oils,  live  stock, 
tobacco,  agricultural  implements,  cotton  manufactures 
and  leather  products.  On  the  other  hand,  the  imports  of 
the  United  States  consist  largely  of  sugar,  coffee,  chemicals, 
drugs  and  dyestuffs,  raw  silk,  India  rubber,  wool,  jewelry 
and  precious  stones,  and  some  copper  and  iron  manu- 
factures. In  a  general  way,  therefore,  the  United  States 
exports  what  the  country  is  well  fitted  to  produce  and  im- 
ports what  other  countries  are  especially  able  to  turn  out. 
Although  there  are  some  striking  exceptions  to  the  rule, 
the  trade  relations  of  the  United  States  may  be  said,  for 
the  most  part,  to  conform  to  this  general  economic  principle. 
The  World  War  stimulated  American  foreign  trade 
enormously,  and  exercised  a  potent  influence  upon  what  is 
known  as  the  "  balance  of  trade."  This  balance  of  trade 
represents  the  difference  between  a  nation's  volume  of 
exports  and  imports.  From  iqio  to  1919  the  annual 
exports  of  the  United  States  to  Europe  increased  from 
approximately  one  and  three-fourths  billion  dollars  to 
more  than  seven  billion  dollars,  while  during  the  same 
period  our  annual  imports  from  Europe  increased  from 
about  one  and  a  half  billion  to  over  three  billion  dollars. 
Thus  our  favorable  balance  of  trade  jumped  from  $250,- 
000,000  in  1910  to  $4,000,000,000  in  1919.  Shortly  after 
the  close  of  the  war  the  balance  of  trade  in  favor  of  the 
United  States  rose  for  a  time  to  even  higher  figures.  This 
meant  that  the  excess  of  goods  sent  to  Europe  had  to  be 
paid  for  in  either  gold  or  credit.  Huge  loans  were  raised 
for  this  purpose ;  but,  in  the  end,  a  large  part  of  the  obliga- 
tion had  to  be  discharged  through  the  payment  of  money. 
The  influx  of  gold  into  the  country  piled  up  prices  still 
higher  and  added  to  the  already  heavy  burden  of  the  in- 


International  Trade  377 

creased  cost  of  living.  We  have  already  seen  that,  when 
money  is  plentiful  and  goods  are  relatively  scarce,  prices 
are  high.  To  effect  an  equilibrium,  exports  and  imports 
must  more  nearly  balance  one  another  so  that  the  gold 
supply  may  shrink  and  goods  become  more  plentiful. 

General  Features  of  Foreign  Trade.  —  To-day  inter- 
national trade  has  taken  on  some  well-defined  char- 
acteristics.    In  the  first  place,  certain  localities   . 

r  7  .Its  charac- 

have  developed  into  world  markets,  that  is,  def-  teristics: 
inite  places  have  become  centers  of  trade  for  World 
particular  commodities.     For  example,  Chicago 
and  Liverpool   are  world  markets   for  wheat.     Each   of 
these  markets  feels  the  effect  of  adverse  conditions  in  the 
other.     If,  therefore,  there  should  be  a  wheat  famine  in 
Europe  and  an  abundant  crop  in  the  United  States,  the 
export  trade  of  the  United  States  in  this  commodity  would 
increase  enormously.     On  the  other  hand,  if   conditions 
were  reversed,  American  exports  would  fall  off. 

In  this  manner,  prices  of  standard  commodities  are 
fixed  in  world  markets,  because  the  condition  of  one  market 
offsets  that  of  the  other  and  usually  prevents  standard 
great  price  fluctuations.  While,  normally,  prices  Prices- 
largely  depend  on  conditions  of  production,  they  them- 
selves determine  the  movement  of  international  trade,  and 
this,  in  turn,  brings  about  an  equilibrium  in  price.  Thus, 
in  response  to  the  difference  in  prices  at  two  centers,  wheat 
may  be  shipped  from  one  country  to  another,  —  a  move- 
ment which  will  ultimately  result  in  this  difference  in  price 
being  largely  eliminated.  With  increased  exportation 
(demand) ,  low  prices  gradually  rise ;  and  with  increased 
importation  (supply),  high  prices  gradually  fall.  The 
cable,  the  telegraph,  and  telephone  easily  make  known  these 


378  American  Economic  Life 

differences  and  a  gradual  equilibrium  in  price  is  ultimately 
effected. 

Another  unique  feature  of  international  trade  is  the  fact 
that  it  is  carried  on  largely  without  the  use  of  money. 
Method  of  The  exports  of  a  country  are  used  chiefly  to 
payment.  pay  for  jts  imp0rts.  If  the  two  amounts  always 
balanced,  little  money  would  be  needed  iri  international 
trade  transactions.  When  exports  are  greater  than  im- 
ports, however,  some  method  of  payment  must  be  devised. 
For  example,  if,  during  a  certain  period,  the  United  States 
exports  to  England  $100,000,000  worth  of  goods  and 
imports  from  England  $75,000,000  worth  of  goods,  Eng- 
land at  the  end  of  that  time  owes  the  United  States  $25,- 
000,000.  As  we  have  seen  in  a  previous  chapter,  the  usual 
method  of  paying  this  balance  of  trade  is  through  bills  of 
exchange  which  make  the  actual  transportation  of  large 
sums  of  money  across  the  water  unnecessary.  Occasion- 
ally, however,  gold  may  be  shipped  from  one  country  to 
another  either  to  settle  a  trade  balance,  or  to  obviate  the 
payment  of  high  rates  on  bills  of  exchange. 

At  this  point  it  may  be  well  to  explain  what  is  meant  by 
the  rate  of  exchange.  Ordinarily,  the  pound  sterling  ex- 
changes for  $4,866  in  American  gold.  In  normal  and  peace- 
ful times,  the  exchange  is  often  effected  at  par,  or  with  but 
a  slight  fluctuation  of  two  or  three  cents  above  or  below 
par.  That  is,  the  pound  may  exchange  for  $4.88  or  for 
$4.84.  When  trade  relations  are  greatly  disturbed  through 
war  or  some  other  abnormal  condition,  the  difference  in 
the  relative  values  of  these  two  units  may,  however,  vary 
considerably ;  and,  in  that  event,  the  rate  of  exchange  may 
fall  to  an  unprecedented  degree.  For  example,  shortly 
after  the  World  War  the  pound  sterling,  for  a  brief  period, 


International  Trade  379 

exchanged  for  only  $3.25.  Under  these  circumstances, 
England  was  practically  forced  for  a  time  to  stop  purchasing 
goods  in  American  markets.  The  rate  of  exchange  was  so 
disadvantageous  to  England  that  she  could  not  afford  to 
pay  for  goods  in  a  market  where  the  value  of  the  pound 
had  fallen  so  low.  However,  this  situation  eventually 
remedies  itself  by  forcing  an  equilibrium  in  trade  con- 
ditions. With  low  rates  of  exchange,  exports  fall  off  and 
imports  increase,  so  that  gold  becomes  less  plentiful  and 
commodity  prices  gradually  fall. 

In  one  form  or  another,  certain  restrictions  have  always 
been  placed  on  international  trade.  In  America,  the 
Navigation  Acts  of  Parliament  were  followed  by  Tx        _ 

0  t  ^     Its   restnc- 

the  tariff  acts  of  our  own  government,  which  tions: 
serve   indirectly    to    restrict    freedom   of   com-  Chief 

.  .      kinds. 

merce.  Of  course,  a  tariff  for  revenue  only  is 
but  a  slight  restriction  on  international  trade.  However,  a 
protective  tariff  forms  a  considerably  greater  obstruction  to 
commerce,  while  retaliatory  tariffs  and  tariffs  so  high  as  to 
become  prohibitive  prove  effectual  barriers  to  the  free 
development  of  international  trade  relations. 

The  purpose  of  restricting  commerce  through  a  protective 
tariff  is  obvious.  Suppose,  for  example,  a  foreign  manu- 
facturer can  produce,  transport,  and  sell  steel 

•i  a  .  1  1  t  Protection. 

rails  to  an  American  firm  at  a  rate  lower  than  that 
of  the  American  steel  producer.  Under  these  circum- 
stances, the  American  manufacturer  will  either  have  to 
invent  a  cheaper  process  of  manufacture  or  be  forced  out 
of  business.  The  first  he  may  be  unable  to  do.  Therefore, 
to  protect  him,  the  government  passes  a  tariff  act  which 
makes  it  possible  for  him  to  manufacture  steel  rails 
profitably  without  being  undersold  in  his  own  market. 


380  American  Economic  Life 

In  order  to  develop  home  manufactures,  cheaper  foreign 
goods  are  thus  displaced  by  more  expensive  native  prod- 
ucts. Whenever  the  manufacturers  of  one  nation  are 
unable  to  compete  successfully  with  those  of  another, 
artificial  barriers  in  the  form  of  tariff  laws  may  be  enacted 
for  their  protection. 

A  policy  of  protection  thus  attracts  labor  and  capital  to 
employments  that  would  otherwise  be  unprofitable.  Since 
the  amount  of  the  tariff  levied  is  at  least  sufficient  to  cover 
the  difference  between  the  cost  of  production  at  home  and 
abroad,  such  a  policy  makes  possible  the  development  of 
"  infant  industries."  Without  this  protection,  the  growing 
industries  of  a  country  would  succumb  under  the  pressure 
of  foreign  competition.  Furthermore,  a  protective  tariff 
makes  it  possible,  in  the  industries  protected,  to  maintain 
the  same  level  of  wages  as  exists  in  other  occupations.  Since 
the  protection  afforded,  however,  applies  practically  only 
to  manufacturing,  mining,  and  in  some  special  cases, 
agricultural  industries,  it  cannot  be  said  that  a  protective 
tariff  is  the  cause  of  a  generally  high  level  of  wages.  So 
far  as  wages  are  concerned,  the  tariff  affects,  perhaps, 
only  one-tenth  of  the  laboring  population  of  the  United 
States. 

As  opposed  to  the  benefits  derived  from  a  system  of  pro- 
tection, a  tariff  policy  entails  certain  disadvantages.  Besides 
increasing  the  cost  of  production,  such  a  policy  may  de- 
crease the  sum  total  of  wealth  produced  in  a  community. 
This  situation  follows  from  the  fact  that,  without  the  arti- 
ficial protection,  labor  and  capital  would  flow  into  those 
channels  of  production  which  offer  naturally  the  greater 
returns.  The  higher  prices  charged  for  the  domestic 
goods,  produced  in  competition  with  foreign  manufacturers, 


International  Trade  381 

also  add  greatly  to  the  burden  placed  on  the  consumer. 
In  other  words  the  home  manufacturer  frequently  derives 
great  profits  at  the  expense  of  the  general  public.  Further- 
more, the  manufacturer  often  attempts  to  maintain  the 
high  level  of  profits,  secured  through  protection,  by  re- 
sorting to  practices  of  favoritism  and  "  log-rolling  "  in 
politics.  Thus,  the  tariff  has  sometimes  developed  into  an 
instrument  which  is  used,  not  for  stimulating  infant  indus- 
tries, but  for  aiding  industries  that  have  become  almost 
monopolistic.  Under  these  circumstances,  the  most  equi- 
table method  of  regulating  a  protective  tariff  is  probably 
found  in  the  establishment  of  a  non-partisan  Tariff  Com- 
mission, which  has  the  power  to  fix  the  duties  in  accordance 
with  the  actual  needs  of  the  industries  of  the  country. 

A  free  trade  policy  attempts  to  remove  the  restrictions 
on  international  trade,  except  in  so  far  as  they  may  be 
necessary  for  purposes  of  revenue.     The  object 

,  ...  ...  Free  trade. 

of  such  restrictions  is  not  to  protect  industries, 
but  to  raise  revenue.  When  taxes- are  levied  on  imports, 
they  are  therefore  usually  laid  upon  non-competitive  prod- 
ucts. Such  a  policy  of  free  trade  results  in  the  production 
of  more  goods,  cheaper  goods,  and  perhaps  better  goods. 
Increased  production  results  from  the  fact  that,  under  a 
system  of  free  trade,  labor  and  capital  always  seek  those 
industries  having  the  greatest  comparative  advantages. 
Under  these  circumstances,  the  goods  produced  are  likely 
to  be  of  superior  quality  ;  and,  because  they  are  tax-free, 
they  are  comparatively  cheap  in  price.  Free  trade  is  the 
logical  consequence  of  the  doctrine  of  local  fitness,  and  the 
result  of  a  world-wide  geographical  application  of  the 
principle  of  division  of  labor. 

From  a  political  standpoint,  however,  the  doctrine  of 


382  American  Economic  Life 

free  trade  has  one  serious  defect  which,  in  the  minds  of 
many  statesmen,  outweighs  all  its  benefits.  Free  trade 
assumes  a  permanent  state  of  normal  and  peaceful  rela- 
tions existing  among  all  nations.  This  theory,  like  that  of 
universal  peace,  is  adapted  to  an  ideal  and  perfect  state 
of  human  nature.  Protection,  on  the  other  hand,  is  based 
upon  the  doctrine  of  nationalism,  and  is  adapted  to  the  stern 
realities  of  everyday  life.  Protection  gives  to  a  nation, 
equipped  with  proper  natural  resources,  the  power  to 
develop  itself  into  a  complete,  self-sustaining  economic 
unit.  Free  trade  makes  one  nation  dependent  upon  an- 
other for  many  necessaries  of  life ;  protection  enables  a 
nation  to  be  strong  and  powerful  in  times  of  international 
crises.  To  make  clear  our  meaning,  we  have  but  to  recall 
the  life-and-death  struggle  through  which  the  world  has 
lately  passed,  and  to  realize  how  much  depended,  in  that 
conflict,  upon  a  nation's  ability  to  be  supremely  self-con- 
tained and  self-supporting  in  all  vital  respects. 

In  conclusion,  we  may  reiterate  that  the  principle  of 
protection  comes  into  conflict  with  the  principle  of  local 
The  fitness,  which  is  the  basis  of  the  doctrine  of  free 

conclusion,  trade.  Under  normal  conditions,  there  is  no 
doubt  that  free  trade  is  beneficial  to  a  community.  In 
addition  to  widening  the  sphere  of  friendly  commercial 
intercourse,  it  results  in  larger  and  cheaper  production 
and  in  better  products.  However,  protection  itself  results 
in  national  benefits.  Chief  among  these  is  its  creation,  in 
our  own  country,  of  a  complete  and  self-sustaining  economic 
unit.  Should  the  United  States,  at  any  time,  be  cut  off 
from  the  rest  of  the  world,  comparatively  little  difference 
would  be  felt  in  the  amount  and  character  of  the  goods 
consumed.     By  encouraging  the  production  of  goods  essen- 


International  Trade  383 

tial   to   industrial   greatness,    protection   has   placed   the 
United  States  in  a  position  of  economic  independence. 

QUESTIONS   FOR  RECITATION 

1.  Why  do  men  trade  ? 

2.  Explain  the  difference  between  individual  trading  and  com- 
munity trading. 

3.  Why  did  foreign  trade  develop  ? 

4.  What  is  the  primary  basis  of  international  trade  ? 

5.  Explain  the  part  played  by  comparative  advantages  in  de- 
termining international  trade. 

6.  Explain  the  factors  disturbing  free  international  trade.  .  Which 
is  most  important  ? 

7.  Name  the  chief  items  in  our  export  and  import  trade. 

8.  Explain  what  is  meant  by  the  "  balance  of   trade."     What 
effect  has  this  on  prices  ? 

9.  Can  a  nation  always  have  a  favorable  balance  of  trade  ?    Ex- 
plain your  position. 

10.  What  effect  had  the  World  War  upon  our  balance  of  trade? 
How  is  the  future  likely  to  affect  it  ? 

11.  Explain  the  meaning  of   world   markets.     How  have   they 
developed? 

1 2.  What  effect  have  world  markets  upon  prices  ?    Explain  clearly. 

13.  How  are  prices  in  world  markets  automatically  adjusted? 

14.  How  are  goods  paid  for  in  international  trading?     When 
is  gold  used? 

15.  Explain  what  is  meant  by  the  rate  of  exchange.     How  may 
it  affect  exports  and  prices? 

16.  Name  the  chief  kinds  of  restrictions  on  trade. 

17.  State  the  relative  advantages  and  disadvantages  of  free  trade 
and  protection. 

PROBLEMS   FOR  DISCUSSION 

1.  Is   foreign   trade   extensive   in  the    South   Pacific   cannibal 
islands  ?     Why  not  ? 

2.  In  foreign  trade,  is  one  nation  the  loser  and  another  the 
gainer? 


384  American  Economic  Life 

3.  May  both  nations  gain  from  international  trade? 

4.  What  are  the  advantages  of  international  trade  ? 

5.  If  Canada  were  annexed  to  the  United  States,  would  the  char- 
acter of  the  trade  between  the  two  regions  be  changed  ? 

6.  Would  a  rise  in  prices  such  as  took  place  during  the  World 
War  increase  imports  ?     Explain  your  answer. 

7.  When  China  becomes  modernized,  may  the  United  States 
expect  to  export  large  quantities  of  manufactures  to  that  country? 
Of  agricultural  products  ?     Why  or  why  not  ? 

8.  How  is  a  country  like  England,  which  has  no  gold  mines, 
supplied  with  gold  ? 

9.  Would  you  expect  gold  to  have  a  lower  value  in  Alaska  than 
in  England  ?     Why  ? 

10.  Why  do  we  not  have  export  duties  in  the  United  States  ? 

11.  What  is  the  distinction  between  a  protective  tariff  and  a 
tariff  for  revenue  only  ? 

12.  What  is  protection?     Why  did  tjie  United  States  adopt  this 
policy  in  its  early  history  ? 

13.  What  is  free  trade ?     Why  did  England  adopt  this  policy? 

14.  Is  the  same  tariff  policy  equally  good  for  all  nations?     Why 
not? 

SUPPLEMENTARY  READING 

Ashley,  P.     Modern  Tariff  History. 

Bastable,  C.  F.     Theory  of  International  Trade. 

Brown,  H.  G.     International  Trade  and  Exchange. 

Escher,  F.     Elements  of  Foreign  Exchange. 

George,  H.     Protection  or  Free  Trade. 

Patten,  S.  N.     The  Economic  Basis  of  Protection. 

Taussig,  F.  W.     Tariff  History  of  the  United  States. 


CHAPTER  XXXVIII 
Taxation 

I.   Division  of  taxation 
i .   Federal  taxation  : 

a.  Customs  duties : 
(i)  Kinds  of  duties 
(2)  Articles  taxed 

b.  Excise  taxes : 

(1)  Meaning  of  excises 

(2)  The  articles  usually  taxed 

(3)  Other  goods  taxed 

c.  The  income  tax  : 

(1)  The  first  acts 

(2)  Act  of  1919 

d.  Excess  profits  tax 

2.    State  and  local  taxation : 

a.  The  character  of  each 

b.  The  general  property  tax 

II.   Principles  of  taxation 

1.  Purpose  of  taxation 

2.  Principle  of  apportionment 

3.  Burden  of  taxation : 

a.  Indirect  taxes : 

(1)  How  their  payment  is  shifted 

(2)  Who  bears  the  burden 

b.  Direct  taxes 

c.  The  conclusion 

Division  of  Taxation.  —  Closely  connected  with  the  sub- 
ject of  trade  is  the  question  of  taxation.  In  fact,  while 
the  primary  purpose  of  protective  tariffs  is  the  encourage- 

385 


386  American  Economic  Life 

ment  of  home  industry  by  the  imposition  of  restrictions 

on  international  trade,  tariff  acts  serve  as  effective  instru- 

.     .         ments  of  taxation  and  are  therefore  very  gen- 
Federal  „  .  .     .  .,  J    6 

taxation:  erally  employed  by  modern  governments  to 
Customs  produce  the  revenue  required  for  their  mainte- 
nance. In  the  United  States  tariff  or  customs 
duties  are  levied  exclusively  by  the  Federal  government 
because  Congress  has  sole  power  to  regulate  trade  with 
foreign  nations.  Before  the  World  War  over  two-fifths  of 
the  revenue  of  the  United  States  was  derived  from  customs 
duties.  These  duties  are  either  specific  or  ad  valorem, 
according  as  to  whether  the  bulk  or  the  value  of  the  com- 
modity is  taxed.  In  the  United  States,  the  number  of 
articles  on  which  it  is  customary  to  levy  such  duties  is  very 
large.  Chief  among  them  are  wool,  sugar,  silk,  molasses, 
iron  and  steel,  cotton,  tobacco,  flax,  chemicals,  glass, 
leather,  earthenware,  and  jewelry.  Thus  it  will  be  noticed 
that  not  only  luxuries,  but  many  necessaries  of  life,  are 
ordinarily  subject  to  this  kind  of  taxation. 

But  while  the  tariff  has  yielded  a  large  revenue,  the 
income  derived  from  excise  taxes  in  the  United  States  has 
been  equally  important.  Excises  are  taxes  laid 
on  articles  consumed,  sold,  or  manufactured 
within  a  country,  and  the  revenue  they  yield  is  known  as 
"  internal  revenue."  The  commodities  most  usually  sub- 
ject to  this  kind  of  taxation  are  tobacco  and  other  luxuries. 
Because  they  are  non-essentials,  these  goods  are  heavily 
taxed,  and  yield  great  revenues.  However,  these  are  not 
the  only  classes  of  goods  subject  to  an  excise  tax.  For 
example,  oleomargarine,  filled  cheese,  mixed  flour,  and 
adulterated  butter  have  been  included  in  this  kind  of  taxa- 
tion.    When,  too,  during  times  of  great  necessity,  it  has 


Taxation  387 

been  found  necessary  to  increase  our  internal  revenue, 
special  taxes  have  been  laid  on  various  articles  not  ordi- 
narily taxed.  During  the  Civil  War,  nearly  all  forms  of 
luxury  were  subject  to  taxation;  during  the  Spanish- 
American  War,  playing  cards,  patent  medicines,  and  legal 
documents  were  taxed;  and,  during  the  World  War,  this 
system  of  taxation  was  extended  to  automobiles  and  auto- 
mobile accessories,  to  pianos  and  musical  instruments,  to 
tennis  rackets  and  sporting  goods,  to  furs,  yachts,  motor 
boats,  and  a  host  of  other  commodities  regarded  as  luxuries. 
However,  with  the  adoption  of  the  income  tax  amend- 
ment to  the  United  States  Constitution  in  19 13,  and  with 
the  outbreak  of  the  World  War  in  1914,  there  The  income 
came  into  operation  a  new  source  of  taxation  tax- 
exceedingly  rich  in  its  possibilities  for  producing  revenue. 
Twice  before  Congress  had  attempted  income  taxation; 
but  the  second  attempt — the  Act  of  1894  —  had  been 
declared  unconstitutional  by  the  Supreme  Court  of  the 
United  States.  With  its  constitutionality  assured  by  the 
amendment  of  19 13,  Congress  passed  the  income  tax  act 
of  that  year,  which  applied  to  incomes  of  single  persons  of 
over  $3000,  and  to  incomes  of  married  persons  of  over 
$4000.  This  act  laid  a  normal  tax  of  one  per  cent  on  such 
incomes,  and  also  a  graduated  surtax,  or  additional  tax, 
of  from  one  to  six  per  cent  on  incomes  in  excess  of  $20,000, 
the  highest  rate  applying  to  the  excess  of  incomes  above 
$500,000.  Because  of  the  reduction  of  revenues  from  cus- 
toms duties  due  to  the  World  War,  this  act  was  revised 
in  191 6,  and  again,  in  191 7.  The  Act  of  191 6  increased 
the  normal  rate  from  one  to  two  per  cent,  and  the  surtax 
rates  were  fixed  at  from  one  to  thirteen  per  cent,  the  latter 
rate  applying  to  the  excess  of  incomes  above  $2,000,000. 


388  American  Economic  Life 

The  Act  of  191 7  raised  these  rates  still  higher,  placing  the 
normal  rate  for  individuals  at  four  per  cent,  and  adding 
to  the  existing  surtax  a  war  surtax  ranging  from  one  to 
fifty  per  cent.  On  incomes  in  excess  of  $2,000,000,  there- 
fore, the  new  tax  reached  a  total  of  sixty-seven  per  cent, 

In  1919,  to  meet  the  accumulated  necessities  of  war,  this 
act  was  further  revised,  and  the  revenues  under  the  act 
thereby  increased.  A  single  set  of  normal  and  surtax 
rates  was  substituted  for  the  former  double  system  of 
reckoning  old  and  new  normal  and  surtax  rates.  The 
limits  of  exemption  were  placed  at  $1000  for  single  men 
and  $2000  for  married  couples.  The  normal  rate  was 
fixed  at  six  per  cent  for  the  first  $4000  of  taxable  income, 
and  at  twelve  per  cent  for  incomes  in  excess  of  that  amount. 
The  surtax  rates  ranged  from  one  to  sixty-five  per  cent,  and 
were  made  applicable  to  the  excess  of  incomes  above 
$5000.  The  progressive  principle  was,  therefore,  not  only 
retained,  but  applied  in  a  still  higher  degree.  As  a  conse- 
quence, the  excess  of  income  above  $1,000,000  was  to  be 
taxed  the  maximum  rate  of  seventy-seven  per  cent.  It  is 
certain,  however,  that,  with  the  adjustments  in  taxation 
following  the  World  War,  the  normal  tax  rates  will  be  re- 
duced, the  Act  of  19 19  having  provided  for  a  reduction  of 
one- third  of  the  rates  of  the  normal  tax  for  1920. 

The  World  War  revealed  the  possibilities  of  still  another 
source  of  revenue.  This  was  found  in  another  kind  of 
Excess  prof-  income  tax  which  has  become  popularly  known 
Us  tax.  as  t^g  excess  profits  tax.     This  tax  was  first 

levied  in  191 7,  and  then  revised  in  191 9,  when  it  was  made 
to  apply  to  corporations  only.  This  tax  was  levied  at  the 
rate  of  twenty  per  cent  on  earnings  exceeding  eight  per  cent 
of  the  corporation's  invested  capital,  and  of  forty  per  cent  on 


Taxation  389 

earnings  exceeding  twenty  per  cent  of  its  invested  capital. 
The  revenue  derived  from  the  excess  profits  tax  and  the 
income  tax,  which  are  combined  in  the  first  Treasury  Re- 
ports, has  been  enormous.  In  1918,  their  total  collections 
amounted  to  nearly  $3,000,000,000 ;  and,  in  1919,  to  nearly 
$4,000,000,000.  Just  what  will  be  the  future  of  this  tax 
is,  however,  problematical.  Like  the  income  tax,  the  excess 
profits  tax  is  almost  certain  to  be  modified  after  the  country 
has  passed  from  a  war  to  a  peace  basis.  However,  inas- 
much as  the  war  left  the  United  States  with  a  debt  of 
$24,000,000,000,  some  effective  means  of  providing  neces- 
sary revenues  must  be  devised.  Since  these  two  sources 
of  taxation  produced  three-fifths  of  our  revenue  in  war 
times,  they  may  still  be  largely  relied  upon  to  yield  the 
revenue  required  in  the  period  of  transition. 

Coming  now  to  the  subject  of  state  and  local  taxation, 
we  find  that  there  are  likewise  certain  well-defined  ways 
in  which  the  states  and  local  units  secure  their 

State  and 

revenues.  The  states  rely  usually  upon  the  local  taxes: 
general  property  tax  and  taxes  levied  upon  Character 
corporations,  licenses,  and  inheritances;  while 
the  local  units  also  depend  largely  upon  the  general  prop- 
erty tax,  as  well  as  poll  taxes.  Therefore,  the  general 
property  tax,  which  the  Federal  government  does  not  em- 
ploy, is  the  main  source  of  both  state  and  local  revenue. 
This  tax  is  laid  nominally  upon  all  property,  both  real  and 
personal,  owned  by  taxpayers,  and  yields  approximately 
seventy-five  per  cent  of  all  state  and  local  receipts. 

Everywhere  the  general  property  tax  is  in  evidence. 
Assessors  value  the  property ;  governing  bodies  fix  the 
tax  rates;  and  local  authorities  collect  the  taxes.  This 
general  property  tax,    although   intended   for   both    real 


39°  American  Economic  Life 

estate  and  personal  property,  does  not  effectively  reach 

personal  property.     The  reason  for  this  is  obvious.     Land 

and  houses  cannot  be  hidden  from  the  eve  of 

General  J 

property        the  tax  collector,  but  personal  property  may  be 
readily  concealed.     This  phase  of  the  tax,  there- 
fore, has  the  effect  of  discriminating  against  truthful  and 
conscientious  citizens. 

Principles  of  Taxation.  —  All  systems  of  taxation, 
whether  national  or  local,  should  be  made  to  conform  to 
Purpose  of  certain  general  principles.  In  the  first  place, 
taxation.  since  a  tax  is  a  compulsory  payment  made  by  an 
individual  for  the  support  of  government,  its  purpose  should 
be  public.  Otherwise,  as  in  the  past,  if  taxation  were 
employed  for  private  purposes,  it  would  constitute  a  form 
of  robbery  and  spoliation.  So  long  as  the  proceeds  of 
taxation  went  into  the  pockets  of  kings  and  nobles  and 
were  spent  by  them  in  riotous  living,  taxation  meant  rob- 
bery. To-day,  however,  although  the  national  govern- 
ment is  obliged  to  spend  large  sums  of  money  for  purposes 
of  protection  and  maintenance,  the  state  and  local  govern- 
ments devote  their  incomes  largely  to  the  advancement 
of  education,  general  security,  and  social  improvements. 
Among  the  latter,  better  streets,  cleaner  water,  and  more 
playgrounds  are  assuming  greater  importance.  Increased 
taxation  may  therefore  mean  higher  social  welfare. 

Another  important  point  to  be  considered  in  any  system 
of  taxation  is  the  principle  according  to  which  taxes  should 
be  apportioned  throughout  the  community.  On 
ofappor-  this  question  there  are  two  opposing  theories. 
On  the  one  hand,  it  is  maintained  that  taxes 
should  be  levied  according  to  special  benefits  received; 
on  the  other,  it  is  held  that  they  should  be  laid  in  propor- 


Taxation  391 

tion  to  ability  to  pay.  If  taxes  were  levied  according  to 
the  first  principle,  those  receiving  most  benefits  —  the  poor 
and  needy  —  would  be  taxed  most  heavily.  This  would 
evidently  be  unjustly  burdensome  to  this  class.  If,  how- 
ever, taxes  were  laid  in  proportion  to  ability  to  pay,  those 
enjoying  the  comforts  of  life  —  the  rich  and  well-to-do  — 
would  contribute  largely  to  the  support  of  government. 
At  the  same  time,  the  mere  existence  of  government  would 
confer  a  very  great  benefit  on  these  wealthy  classes  and 
justify  their  large  contributions  to  public  support.  There- 
fore, we  must  conclude  from  the  standpoint  of  social  welfare, 
that  ability  to  pay,  not  benefits  received,  should  be  the 
determining  factor  in  apportioning  taxes. 

Directly  connected  with  this  subject  of  apportionment 
is  the  question  of  the  burden  of  taxation.     A  tax  may  be 
intended  for  one  person  but  paid  by  another. 
That  is,  the  first  taxpayer  may  shift  the  pay-  taxation: 
ment  of  the  tax  to  another,  and,  in  this  manner,   indirect 
make  the  burden  of  taxation  fall  on  some  one  not 
originally   intended.     Taxes   which   may   be    shifted    are 
usually  spoken  of  as  indirect  taxes,  while  those  which  may 
not  are  called  direct  taxes.     Customs  duties  are  typical 
of  indirect  taxes.     They  are  levied  on  foreign  manufactures 
and  are  originally  paid  by  the  importer  of  the  goods ;   but 
the  importer,  in  turn,  shifts  their  payment  to  the  consumer 
in  the  form  of  higher  prices.     Meanwhile,  if  the  consumer 
decides  to  buy  the  domestic  article,  he  finds  of  course  that 
its  price  has  correspondingly  increased.     Therefore,  whether 
he  buys  the  domestic  or  imported  article,  the  burden  of 
this  tax  falls  on  the  consumer.     If  he  does  not  actually 
pay  it  to  the  government,  he  does  in  reality  to  the  home 
manufacturer.     Formerly,    in    the    United    States,    since 


392  American  Economic  Life 

customs  duties  were  so  generally  levied  in  the  country  and 
since  they  fell  so  largely  upon  commodities  in  common  use, 
like  sugar  and  woolen  goods,  the  burden  of  taxation  rested 
chiefly  upon  the  poor.  This  was  further  accentuated  by 
the  fact  that  excise  taxes,  which  may  also  be  shifted,  were 
heavily  laid  on  tobacco  and  liquors  which,  before  the  advent 
of  prohibition,  constituted  an  important  item  in  middle 
class  consumption. 

On  the  other  hand,  direct  taxes  are  taxes  which  cannot 

readily  be  shifted.     The  best  examples  of  these  are  poll 

taxes,   taxes  on  land,   and  on  incomes.     Since 

Direct  taxes. 

these  taxes  must  be  paid  directly  by  the  in- 
dividual owning  the  property  or  income,  it  is  difficult  to 
shift  their  payment  upon  some  one  else.  The  direct  tax, 
therefore,  reaches  the  person  intended.  Before  1913,  it 
was  practically  impossible  for  the  national  government 
to  employ  this  form  of  direct  taxation  so  far  as  individual 
incomes  were  concerned.  It  is  true  that,  in  Civil  War 
times,  Congress  had  passed  an  income  tax  law,  and  the 
Supreme  Court  had  declared  it  constitutional.  But,  in 
1894,  Congress  passed  another  such  law  and  the  Supreme 
Court  declared  it  violated  the  constitutional  provision  re- 
quiring direct  taxes  to  be  apportioned  among  the  several 
states  "  according  to  their  respective  numbers."  Since 
the  direct  tax  could  not  be  utilized,  the  burden  of  taxation 
continued  to  fall,  at  that  time,  upon  the  poorer  classes. 

Recently,  however,  this  situation  has  been  entirely 
changed.  In  1913  an  amendment  to  the  United  States 
The  Constitution  disposed  of  the  legal  difficulties  in 

conclusion,  fae  way  0f  levying  an  income  tax,  and  Congress 
accordingly  enacted  such  a  law.  The  great  burden  of  taxa- 
tion imposed  on  the  poor  by  means  of  duties  and  excises 


Taxation  393 

was  thus  offset  by  the  direct  taxation  of  the  wealthier 
classes.  The  income  tax  was  the  most  simple  means  of 
bringing  about  this  more  just  apportionment.  While  the 
well-to-do  classes  are  also  subject  to  the  general  property- 
tax  of  the  state  and  local  governments,  the  concealment 
of  stocks  and  bonds  and  other  personal  property  offers 
frequent  opportunity  for  escaping  just  taxation.  The  in- 
come and  excess  profits  taxes  cannot,  however,  be  equally 
well  evaded. 

QUESTIONS   FOR  RECITATION 

1.  Name  four  kinds  of  federal  taxes.     Define  each. 

2.  What  is  the  difference  between  ad  valorem  and  specific  duties? 

3.  Name  the  articles  usually  subject  to  customs  duties.  State 
the  reason  in  each  case. 

4.  What  are  excises?  What  goods  are  subject  to  this  form  of 
taxation  ? 

5.  During  World  War  times  how  was  taxation  extended  ?  Were 
legal  transactions  taxed  ?     Give  examples. 

6.  What  were  the  chief  sources  of  federal  taxation  before  the 
World  War?  After  the  World  War?  What  made  the  change  pos- 
sible ?     Why  was  it  necessary  ? 

7.  Explain  the  provisions  of  the  revenue  tax  law  of  19 13. 

8.  When  and  why  was  this  act  revised?  What  was  the  effect 
each  time? 

9.  Explain  clearly  the  provisions  of  the  Revenue  Act  of  19 19. 

10.  What  is  the  excess  profits  tax?     How  much  revenue  did  this, 
with  the  income  tax,  yield  the  United  States  in  war  times  ? 

11.  Do  you  think  these  two  forms  of  taxation  need  revision? 

12.  What  is  the  chief  source  of  state  and  local  revenues?     Name 
some  other  sources. 

13.  Explain  the  chief  defect  in  our  system  of  state  and  local  taxa- 
tion.    How  would  you  remedy  it  ? 

14.  What  should  be  the  purpose  of  taxation ?    Why? 

15.  How  should  taxes  be  apportioned  or  distributed  throughout 
the  community?    Why? 


394  American  Economic  Life 

1 6.  Explain  the  difference  between  direct   and  indirect   taxes, 
giving  examples  of  each. 

17.  What  is  meant  by  the  "burden  of  taxation"?    How  is  it 
affected  by  direct  and  indirect  taxation  ? 

PROBLEMS   FOR  DISCUSSION 

1.  What  are  the  reasons  for  changing  tariff  duties  from  time 
to  time? 

2.  Explain  the  attitude  of  the  different  sections  of  the  country 
toward  the  tariff. 

3.  What  advantages  does  a  system  of  customs  duties  offer  as  a 
means  of  raising  revenue  ? 

4.  Would  customs  duties  be  a  satisfactory  source  of  revenue  for 
the  United  States  in  time  of  war? 

5.  Make  a  list  of  the  disadvantages  of  a  system  of  customs 
duties. 

6.  Who  bears  the  burden  of  a  revenue  tariff? 

7.  Who  bears  the  burden  of  excise  taxes? 

8.  Who  bears  the  burden  of  an  income  tax? 

9.  Should  incomes  below  a  certain  amount  be  exempt  from 
taxation  ?     Why  ? 

10.  How  high  a  rate  should  you  approve  in  taxation  of  inherit- 
ances ? 

11.  What  effect  had  the  World  War  upon  our  system  of  taxa- 
tion? 

12.  What  are  the  chief  characteristics  of  our  system  of  state  and 
local  taxation? 

13.  How  may  taxation  affect  the  problem  of  surplus  wealth? 

14.  What  do  we  mean  by  a  progressive  income  tax? 

15.  What  tax,  or  taxes,  do  you  think  will  usually  form  the  main 
source  of  our  national  revenue ?    Why? 

16.  Why  did  we  not  make  general  use  of  income  taxes  earlier  in 
our  history  ? 

17.  In  the  past,  what  was  the  chief  defect  in  our  system  of  federal 
taxation?    How  has  it  been  remedied? 


Taxation  395 

SUPPLEMENTARY  READING 

Adams,  H.  C.    Science  of  Finance. 

Bullock,  C.  J.     Selected  Readings  in  Public  Finance,  Chaps.  VII- 

XIX. 
Ely,  R.  T.     Taxation  in  American  States  and  Cities. 
Seligman,  E.  R.  A.    Essays  in  Taxation. 
Seligman,  E.  R.  A.     The  Income  Tax. 
Taussig,  F.  W.    Principles  of  Economics,  Book  VIII. 
West,  M.     The  Inheritance  Tax,  Chaps.  VII  and  IX. 


PART   FIVE 
PROBLEMS   OF   DISTRIBUTION 

CHAPTER  XXXIX 

A  Survey  of  Distribution 

I.   Nature  of  distribution 
i .   Meaning  of  distribution 

2.  The  shares  in  distribution : 

a.  How  they  arise 

b.  What  they  are  called 

3.  Inequalities  of  income  : 

a.  Causes : 

(1)  Differences  in  productivity 

(2)  Monopoly  of  land 

(3)  Monopoly  of  capital 

(4)  Exploitation  of  labor 

b.  The  consequences 

c.  Some  examples 

II.    Groups  of  distribution  theories 

1 .  The  productivity  theory : 

a.  Its  basis 

b.  What  it  advocates 

2.  The  monopoly  theory  : 

a.  Its  basis 

b.  What  it  advocates 

3.  The  conclusion 

In  our  treatment  of  American  economic  life  thus  far,  we 
have  considered  the  problems  arising  from  the  consumption, 
production,  and  exchange  of  wealth.     The  chapters  de- 

396 


A  Survey  of  Distribution  397 

voted  to  a  discussion  of  the  mechanism  of  exchange  have 
shown  us  that  this  phase  of  economics,  in  common  with 
all  its  other  parts,  is  intimately  connected  with  the  subject 
of  individual  and  social  welfare.  There  still  remains  one 
phase  of  wealth  that  we  have  yet  to  consider ;  that  is,  the 
problem  of  its  distribution. 

Nature  of  Distribution.  —  The  problem  of  distribution 
deals  with  the  principles  according  to  which  the  wealth  of 
society  is  distributed  among  the  factors  which  Meaning  of 
have  produced  it.  Just  as  the  principles  of  distribution, 
exchange  deal  with  the  mechanism  whereby  goods  are 
transferred  from  one  person  to  another  through  the  medium 
of  money,  credit,  trade,  or  some  similar  device,  so  the 
principles  of  distribution  are  concerned  with  the  manner 
in  which  land,  labor,  and  capital  receive  the  shares  of  the 
wealth  created  by  their  united  action.  In  this  sense, 
distribution  must  not  be  confounded  with  the  process  by 
which  goods  are  transferred  from  place  to  place,  or  from 
person  to  person.  Furthermore,  the  problem  of  distri- 
bution deals  primarily  with  the  shares  assigned  to  the 
factors  of  production,  and  not  with  the  incomes  of  indi- 
viduals. But,  since  the  institution  of  private  property 
legalizes  the  ownership  of  these  shares  in  the  hands  of 
private  individuals,  the  question  of  personal  income  is 
inseparably  connected  with  the  distribution  of  these 
shares  among  the  factors  of  production. 

To  the  student  of  distribution,  two  questions  naturally 
present  themselves  :  How  is  wealth  created  ?  How  is  this 
wealth  distributed  ?  If  three  men  build  a  boat,  the  value 
of  this  boat  is  divided  among  the  factors  entering  into  its 
production.  If,  however,  instead  of  a  boat,  all  the  wealth 
of  society  is  to  be  considered,  it  becomes  necessary  to  in- 


398 


American  Economic  Life 


quire  in  detail  what  factors  produced  this  wealth  in  order 
to  know  how  its  money  value  should  be  distributed.  The 
The  shares  factors  which  produce  wealth  are  land,  labor, 
^nond!stribu-  and  capital.  Therefore  if  land,  labor,  and  capi- 
jjow  tal  have  produced  the  wealth  of  society,  these 

they  arise.  same  f actors  must  be  entitled  to  its  use  and 
enjoyment.  This  is  the  basis  of  the  distribution  of  wealth 
throughout  society.  Each  factor  of  production  is  entitled 
to  a  share  in  distribution  by  reason  of  the  part  it  has  played 
in  production. 

In  order  clearly  to  distinguish  these  shares  from  one 
another,  the  science  of  economics  differentiates  them  by 
What  they  distinct  phraseology.  That  is,  it  applies  a 
are  called.  separate  term  to  the  share  of  wealth  received  by 
each  of  the  factors  of  production.  The  terms  employed 
must  not  be  confounded  with  the  popular  meaning  some- 
times attributed  to  them.  The  name  of  land's  share  is 
rent;  of  capital's  share,  interest;  of  labor's  share,  wages. 
As  we  have  said,  the  basis  for  the  existence  of  these  shares 
lies  in  the  productive  power  of  the  agents  creating  them. 
These  factors  of  production  and  shares  in  distribution  may 
be  represented  in  a  simple  manner  by  the  following  diagram  : 


Shares  in  Distribution 


Rent 

Interest 

Wages 

|         We 

alth    or  |      Goo 

ds 

t 

Land 

t 

Capital 

t 

Labor 

Factors  of  Production 


In  our  further  discussion  of  this  problem  it  will  be  shown 
that  certain  modern  conditions  interfere  to  prevent  the  shares 


A  Survey  of  Distribution  399 

in  distribution  from  corresponding  exactly  to  the  respective 
parts  played  by  the  factors  of  production;  that  other  ele- 
ments enter  not  only  into  production  but  also  into  distribu- 
tion; and  that  these  shares  themselves,  as  the  diagram 
might  seem  to  indicate,  are  by  no  means  equal  in  amount. 
We  have  said  that,  because  of  the  institution  of  private 
property,  the  question  of  the  shares  of  wealth  created  by 
the  factors  of  production  is  inseparably  inter-  inequaiities 
woven  with  the  problem  of  individual  incomes,  of  income: 
For  example,  rent,  although  created  by  land,  is  The  causes' 
appropriated  by  the  landlord ;  interest,  although  produced 
by  capital,  is  enjoyed  by  the  capitalist;  while  wages,  the 
rewards  of  labor,  are  naturally  appropriated  by  laborers. 
Therefore,  if  rent  and  interest  increase  rapidly  and  wages 
do  not,  the  income  of  landlords  and  capitalists  will  rise, 
while  that  of  laborers  may  remain  stationary.  These 
inequalities  of  wealth  and  income  constitute  a  very  real 
factor  in  the  life  of  every  modern  community.  Fifth 
Avenue  stands  out  in  sharp  contrast  to  the  lower  East 
Side.  Compared  to  the  adversity  of  the  many,  the  pros- 
perity of  the  few  is  exceptional.  Here,  for  example,  is 
one  family  with  an  income  of  a  thousand  dollars  a  month, 
and  there  another,  struggling  to  maintain  itself  on  a  thou- 
sand dollars  a  year.  What,  then,  are  the  causes  of  this 
great  inequality  of  income?  Many  explanations  and 
suggestions  have  been  offered  to  account  for  this  difference 
of  social  income,  but  there  is  little  harmony  of  opinion 
among  writers  as  to  its  ultimate  cause.  However,  in 
America,  four  factors  seem  to  stand  out  as  prominent  and 
striking  causes  of  such  inequality:  (1)  differences  in  pro- 
ductive capacity,  (2)  monopoly  of  land,  (3)  monopoly  of 
capital,  and  (4)  exploitation  of  labor. 


400  American  Economic  Life 

One  of  the  most  important  causes  of  difference  of  income, 
that  is,  of  difference  in  the  distribution  of  the  product  of 
industry,  is  found  in  varying  productive  capacity.  In 
the  last  analysis,  the  amount  of  wealth  that  can  be  dis- 
tributed throughout  a  community  depends  upon  the 
amount  of  wealth  that  can  be  produced.  The  amount  of 
wealth  produced  will  depend  largely  upon  the  abundance 
and  fertility  of  natural  resources  and  upon  the  efficiency  of 
labor.  When  natural  resources  are  plentiful  and  properly 
utilized,  it  is  evident  that  the  sum  total  of  the  product  to 
be  divided  will  be  greatly  increased.  Similarly,  when  labor 
is  intelligent  and  adequate,  the  amount  of  wealth  produced 
will  be  favorably  affected.  In  the  former  case,  however, 
land's  share  would  naturally  increase,  while  in  the  latter 
case,  labor  would  correspondingly  benefit.  But,  when- 
ever labor  is  unproductive  or  inefficient,  its  relative  share 
in  wealth  distribution  will  suffer.  Many  inequalities  in 
income,  therefore,  are  due  to  shiftlessness,  idleness,  or 
inefficiency  in  labor.  Such  differences  are  perfectly  clear 
and  explainable.  On  this  basis,  if  one  man's  income  is 
one  thousand  dollars  a  year,  and  another's  ten  thousand 
dollars  a  year,  the  difference  is  due  to  the  fact  that  the 
first  laborer  has  but  one-tenth  the  productive  capacity  of 
the  second.  Labor  is  thus  held  responsible  for  its  own 
condition. 

Opposed  to  this  explanation  of  inequalities  of  income, 
we  have  the  view  of  those  who  primarily  attribute  such 
inequalities  to  the  factors  of  monopoly  and  exploitation. 
The  effect  of  the  monopoly  of  natural  resources  upon  wealth 
distribution  may  be  readily  discerned.  No  one  can  fail 
to  see  the  social  importance  of  this  monopoly  control. 
Since  prosperity  is  directly  dependent  on  natural  resources, 


A  Survey  of  Distribution  401 

every  effort  should  be  made  to  extend  the  use  of  natural 
resources  to  all  members  of  the  community.  If,  however, 
these  resources  should  be  monopolized,  or  withheld  from 
use  by  a  few  individuals,  the  great  mass  of  people  would 
either  be  deprived  of  natural  advantages,  or  forced  to  pay 
exorbitant  prices  for  the  enjoyment  of  their  products. 
Through  the  monopoly  of  land,  prices  may  be  so  controlled 
as  to  deprive  the  consumer  of  a  large  part  of  his  income. 
Thus,  very  real  inequalities  of  income  may  result. 

Monopoly  price,  arising  from  the  monopoly  of  natural 
resources,  is  thus  one  means  of  shifting  income  from  one 
class  to  another.  But  the  determination  of  monopoly 
price  does  not  depend  entirely  upon  the  monopoly  of 
natural  resources.  Monopoly  of  capital  is  also  a  factor 
in  determining  monopoly  price  and  in  bringing  about 
huge  monopoly  incomes.  The  concentration  of  great 
masses  of  capital  in  the  hands  of  a  few  individuals  gives 
them  a  tremendous  advantage  in  fixing  prices,  and  in  divert- 
ing incomes  from  others  to  themselves.  Likewise,  special 
privileges,  secured  through  patents  and  copyrights,  play 
an  important  part  in  creating  inequalities  of  income. 

Because  of  this  monopoly  power,  some  writers  maintain 
that  the  wealth  of  one  group  in  society  often  increases  at 
the  expense  of  another.  They  take  the  view  that,  if  certain 
men  receive  more  than  they  produce,  others  receive  less 
than  they  produce.  Setting  aside,  for  the  moment,  the 
monopoly  power  that  comes  from  exceptional  capacity  or 
unusual  training,  it  is  maintained  by  this  school  of  writers 
that  the  monopolist,  deriving  his  power  through  an  excep- 
tional control  over  land  or  capital,  is  reaping  where  he  has 
not  sown,  that  is,  securing  value  which  he  has  not  produced. 
If,  therefore,  labor  has  produced  this  value  and  is  deprived 


402  American  Economic  Life 

of  it,  the  monopolist  is  charged  with  exploiting  labor  for 
his  own  benefit.  In  this  manner,  monopoly  of  land,  mo- 
nopoly of  capital,  and  exploitation  of  labor  constitute,  in  the 
opinion  of  these  writers,  a  series  of  causes  which  explain 
many  of  the  inequalities  in  income. 

Despite  any  difference  of  opinion  regarding  the  causes  of 
these  inequalities  of  income,  there  can,  however,  be  no 
The  conse-  doubt  of  their  existence  and  consequences.  We 
quences.  have  seen  that  a  standard  of  living  is  determined 
largely  by  wages,  and  we  now  see  that  wages  is  a  part  of 
the  problem  of  distribution.  Therefore,  inequalities  of 
income  have  a  direct  effect  upon  standards  of  living.  While, 
to-day,  comparatively  few  individuals  have  such  great 
incomes  as  to  permit  the  development  of  the  highest  possible 
economic  standards,  large  numbers  of  people  are  existing 
on  a  standard  of  living  which  does  not  satisfy  the  re- 
quirements of  modern  life.  As  a  consequence,  the  children 
of  these  families  are  likely  to  grow  up  to  be  inefficient  in- 
dustrial workers. 

While  the  fruits  of  modern  economic  progress  have  not 
been  wholly  confined  to  a  small  class,  it  is  nevertheless 
Some  true  that  there  is  a  surprising  amount  of  poverty 

examples.  existing  in  America.  On  this  point,  the  report 
of  the  United  States  Commission  on  Industrial  Relations, 
issued  in  191 5,  said,  "  It  is  certain  that  at  least  one-third, 
and  possibly  one-half,  of  the  families  of  wage-earners  em- 
ployed in  manufacturing  and  mining  earn  in  the  course  of 
the  year  less  than  enough  to  support  them  in  anything 
like  a  comfortable  and  decent  condition. "  On  the  other 
hand,  the  income  tax  returns  for  the  calendar  year  191 7 
showed  that  3,472,890  persons  reported  net  personal  in- 
comes in  excess  of  $1000.    At  the  same  time  the  returns 


A  Survey  of  Distribution  403 

showed  1015  incomes  in  excess  of  $300,000,  and  141  in- 
comes of  $1,000,000  or  over  per  year.  The  fact  of  inequali- 
ties in  income  is  therefore  conclusively  established. 

Groups  of  Distribution  Theories.  —  Unfortunately,  econ- 
omists do  not  agree  on  one  single  theory  of  distribution. 
In  fact,  opinion  has  been  so  divided  that  many  Th 
conflicting  theories  have  been  advanced  from  ductivity 
time  to  time.     In  general,  however,  theories  of      eory" 
distribution  may  at  present  be  divided  into  two 
main  groups,  (1)  those  emphasizing  productivity,  and  (2) 
those  stressing  monopoly  as  a  determining  factor  in  the 
problem.     While  both  these  schools  of  writers  believe  in 
social  justice,  they  vary  in  their  explanations  of  the  causes 
of  inequalities  of  income.     The  productivity  school  bases 
its  theory  on  competition  and  productive  capacity.     Its 
followers  hold  that  certain  natural  laws  tend  to  produce 
given  results.     One   of   these   natural  laws,   competition, 
will  result  in  a  just  system  of  distribution  provided  it  be 
left  free  to  work  itself  out.     In  the  absence  of  competition, 
distributive    justice   is   obviously   impossible ;    but,  were 
competition   widespread,    a   just    system    of    distribution 
founded  on  productive  capacity  would  be  inevitable. 

Proceeding  on  this  basis,  the  productivity  theorists  apply 
their  system  to  modern  society  through  the  program  of 
government  regulation.  They  admit  the  pres-  what  it 
ence  of  monopoly  but  direct  all  their  efforts  advocates- 
towards  its  abolition,  because  they  believe  that  only  through 
competition  will  justice  be  realized.  That  is,  they  advo- 
cate government  regulation  of  industry.  This  theory 
holds  that  the  shares  in  distribution  are  determined  exactly 
by  the  productivity  of  the  factors.  That  is,  if  a  tin  dipper 
costs  ten  cents,  and  if  natural  resources  contributed  two 


404  American  Economic  Life 

cents  to  its  production,  under  a  strictly  competitive  regime, 
natural  resources  would  be  paid  two  cents  in  rent.  In  the 
same  way,  if  labor  contributed  four  cents,  labor  would 
receive  four  cents  as  wages.  Thus,  if  competition  can  be 
made  free,  society  will  naturally  right  itself  by  the  action 
of  this  universal  law. 

The  monopoly  theory  of  distribution,  in  distinct  contrast 
to  this  productivity  theory,  looks  upon  monopoly  as  the 
factor  of  prime  importance  and  as  the  logical 
monopoly  outcome  of  present  social  development.  Social 
theory:  evolution,  it  is  asserted,  has  reached  a  stage  in 
which  monopoly  is  inevitable.  This  school, 
therefore,  takes  the  position  that  no  person  is  to  blame 
for  modern  industrial  monopoly.  Monopoly  is  not 
"  wrong."  It  is  merely  a  product  of  modern  industrial 
conditions.  In  other  words,  monopoly  is  an  economic 
law  of  modern  society.  Therefore,  in  solving  the  distribu- 
tion problem,  monopoly,  not  productivity,  is  looked  upon 
as  of  primary  importance.  According  to  the  theories 
advanced  by  this  group,  if  natural  resources  contribute 
but  two  cents  to  the  actual  production  of  the  dipper, 
nevertheless,  because  of  the  monopoly  which  the  owner  of 
the  natural  resources  possesses,  the  amount  which  goes 
to  him  may  be  three  cents,  —  two  cents  representing  the 
contribution  of  natural  resources  and  one  cent  representing 
monopoly  power. 

If  the  monopoly  theory  be  true,  the  method  of  securing 
a  more  equal  distribution  of  wealth  lies  in  the  increase  of 
What  u  monopoly  power  rather  than  in  its  abolition. 
advocates.  This  school,  therefore,  advocates  increasing 
especially  labor's  monopoly  power.  Does  the  laborer  feel 
that  he  is  being  unfairly  treated  by  not  securing  the  full 


A  Survey  of  Distribution  405 

value  of  his  work  ?  Or,  does  he  think  he  is  being  exploited 
by  his  employer?  If  so,  he  has  but  one  remedy.  That 
is,  he  must  secure  through  organization,  education,  or 
legislation  some  special  monopoly  power  which  will  enable 
him  to  make  headway  against  the  monopoly  power  enjoyed 
by  his  employer. 

In  contrasting  these  two  theories,  it  may  be  said  that 
the  productivity  theory  of  distribution  is  really  a  picture  of 
what  might  be  under  ideal  conditions  of  compe-  The 
tition,  while  the  monopoly  theory  is  an  attempt  concl«sion. 
to  analyze  things  as  they  really  are.  For  this  reason  the 
monopoly  theory  is  regarded  by  some  as  furnishing  a  more 
adequate  basis  than  the  productivity  theory  for  a  dis- 
cussion of  modern  problems  of  distribution.  While,  there- 
fore, in  the  following  chapters,  the  productivity  theory  of 
distribution  will  always  be  emphasized,  mention  will  be 
made  of  the  monopoly  principle  whenever  it  appears  to 
be  one  of  the  determining  factors  in  distribution.  How- 
ever, in  our  study  of  distribution  problems  it  is  well  to 
remember  that  frequently  both  of  these  principles  are  simul- 
taneously at  work. 

QUESTIONS  FOR  RECITATION 

1.  Explain  clearly  the  meaning  of  "distribution."  Show  how 
it  differs  from  exchange ;  from  transportation. 

2.  What  names  are  given  to  the  shares  in  distribution?  De- 
fine each.     Show  their  relation  to  the  factors  of  production. 

3.  Are  inequalities  in  shares  the  same  as  inequalities  in  incomes? 
How  do  they  differ?  How  are  they  related?  What  is  the  reason 
for  this  relation? 

4.  Why  do  we  have  the  landlord  and  the  capitalist  ?  What 
effect  has  each  upon  the  problem  of  wealth  distribution  ? 

5.  Name  the  primary  cause  of  inequalities  in  income ;  the  sec- 
ondary causes. 


406  American  Economic  Life 

6.  Show  how  each  of  the  above  causes  produces  inequalities  of 
income. 

7.  What  inequalities  are  justifiable ?    Which  are  not?    Why? 

8.  Do  you  believe  that  most  of  the  inequalities  of  income,  to-day, 
are  based  on  just  or  unjust  causes?    Why? 

9.  Explain  the  consequences  of  inequalities  of  income.     Give 
examples  of  such  inequalities. 

10.  Do  you  believe,  to-day,  that  the  -rich  are  richer  and  the 
poor  are  poorer  than  they  were  a  hundred  years  ago?  State  your 
reasons. 

11.  What  is  meant  by  the  productivity  theory  of  distribution? 
Upon  what  does  this  theory  depend  ? 

12.  What  do  the  supporters  of  the  productivity  theory  advocate? 
Why? 

13.  Explain  the  position  of  the  supporters  of  the  monopoly  theory 
of  distribution.     What  do  they  advocate  ? 

14.  Show  the  conditions  to  which  these  two  theories  are  applicable. 

15.  How  may  these  theories  be  blended  in  a  discussion  of  the 
problems  of  distribution?     Give  some  examples. 

PROBLEMS  FOR  DISCUSSION 

1.  In  economics  should  the  emphasis  be  laid,  to-day,  rather  on 
the  subject  of  distribution  or  on  that  of  production  ?     Why  ? 

2.  If  a  man  produces  one  commodity,  how  does  he  satisfy  his 
wants  ?     Upon  what  will  his  ability  to  satisfy  his  wants  depend  ? 

3.  What  idea  lies  back  of  the  expression  "  distribution  of  wealth  "  ? 

4.  What  are  the  different  methods  by  which  people  obtain  their 
incomes  ? 

5.  How  can  a  chair  be  said  to  be  distributed  among  the  land, 
labor,  and  capital  creating  it  ? 

6.  What  is  the  relation  of  private  property  to  distribution? 
How  is  this  illustrated  in  the  case  of  land  ?    In  the  case  of  capital  ? 

7.  Was  there  any  distributive  problem  when  each  household  was 
economically  self-sufficient  ?    Why  not  ? 

8.  When  we  speak  of  the  economic  inequalities  of  to-day,  do  we 
mean  inequalities  of  property  or  of  income  ? 

9.  Is  there  any  relation  between  political  democracy  and  in- 


A  Survey  of  Distribution  407 

dustrial  democracy?    What  bearing  has   this  problem   upon  dis- 
tribution ? 

10.  If  a  man  cooperates  with  others  in  making  a  commodity,  what 
determines  the  extent  of  the  share  he  can  secure  ? 

11.  Should  a  man  be  paid  according  to  his  ability  or  according  to 
his  needs?    Why? 

12.  What  is  the  relation  between  distribution  and  production? 

13.  Explain  how  our  present  system  of  wealth  distribution  might 
be  changed  (a)  by  law,  (b)  by  revolution.     Is  either  desirable  ? 

14.  Give  some  examples  from  history  of  such  changes. 

15.  How  is  the  problem  of  distribution  bound  up  with  the  problem 
of  welfare  ? 

16.  What  share  in  the  distribution  of  wealth  is  not  mentioned  in 
this  chapter?    Why? 

17.  Explain  the  relation  between  abundant  natural  resources 
and  national  prosperity.  How  would  this  affect  the  distribution  of 
wealth? 

SUPPLEMENTARY  READING 

Carver,  T.  N.     The  Distribution  of  Wealth,  Chap.  II. 

Clark,  J.  B.     The  Distribution  of  Wealth,  Chaps.  VII-XIII. 

Commons,  J.  R.     The  Distribution  of  Wealth,  Chap.  Ill,  pp.  252  seq. 

Hobson,  J.  A.     The  Social  Problem,  Chap.  IV. 

King,  W.  I.     The  Wealth  and  Income  of  the  People  of  the  United 

States. 
Patten,  S.  N.     The  Theory  of  Prosperity. 
Taussig,  F.  W.     Principles  of  Economics,  Vol.  II,  Chap.  LIV. 
Youngman,  A.     Economic  Causes  of  Great  Fortunes. 


CHAPTER  XL 

The  Theory  of  Rent 

I.   Nature  of  rent 

i .  What  rent  means 

2.  How  rent  is  paid 

3.  How  rent  arises: 

a.  From  differences  of  fertility 

b.  From  differences  of  location 

4.  The  conclusion 

II.    Grades  of  land 

1.  The  usual  grades 

2.  The  "  no-rent  "  land 

3.  How  rent  varies  : 

a.  Between  grades 

b.  Within  a  grade  : 

(1)  Marginal  rent 

(2)  Differential  rent 

(3)  An  illustration 

c.  The  general  principle 

d.  Explanation  of  diagram 

e.  Other  applications  of  the  law 

4.  The  danger 

Nature  of  Rent.  —  The  most  generally  accepted  and 
most  firmly  established  theory  of  distribution  is  that  re- 
What  lating  to  rent.     Rent  is  the  return  on  natural  re- 

"  rent "  sources,  and,  in  economics,  means  the  amount  of 

wealth  that  "  land  "  receives  for  its  part  in  pro- 
duction. Therefore,  from  an  economic  standpoint,  "  rent  " 
means  something  quite  different  from  the  sense  in  which 

408 


The  Theory  of  Rent  409 

the  word  is  used  by  the  real  estate  broker.  The  latter  uses 
the  term  to  represent  not  only  the  return  on  land  —  the 
lot  —  but  also  the  return  on  capital  —  the  house.  Real 
estate  rent  includes  both  rent  and  interest;  economic 
rent  signifies  simply  the  return  on  land.  This  distinction 
is  fundamental  and  must  always  be  borne  in  mind. 

It  is  equally  important  to  remember  that  rent  exists 
regardless  of  the  manner  in  which  it  is  paid,  or  of  the  per- 
son to  whom  it  is  paid.  For  example,  land  may  How  rent 
receive  its  share  of  rent  in  the  form  of  so  many  is  paid- 
extra  bushels  of  wheat,  as  well  as  in  the  form  of  money 
representing  these  bushels  of  wheat.  Similarly,  this  rent 
is  paid  to  land  regardless  of  whether  the  land  is  used  by 
the  owner,  or  by  the  tenant.  Since  land  cannot  take  this 
rent  itself,  some  one  takes  it  for  the  land.  The  landlord 
receives  the  rent.  If  he  uses  the  land  himself,  he  receives 
it  in  the  form  of  extra  crops ;  if  some  one  else  uses  it,  he 
takes  it  in  the  form  of  money.  When  the  owner  and  the 
user  are  two  different  persons,  it  may  easily  be  seen  that 
the  payment  of  rent  becomes  more  marked  and  socially 
significant.  This  fact  is  well  brought  out  in  the  history 
of  Ireland  where,  for  centuries,  rents  have  been  exacted 
from  the  peasants  by  their  English  landlords. 

Since  rent  exists  so  generally,  it  is  important  to  under- 
stand clearly  how  it  arises.     Rent  arises  because  of  differ- 
ences in  the  productive  capacity  of  various  lands. 
This  difference  in  productivity  may  be  due  to  a  ^Z™** 
difference  in  the  fertility  of  the  soil,  or  to  a  differ-  From  differ- 
ence in  the  location  of  the  land.     First  of  all,  J2L  of 

»   fertility. 

picture  in  your   mind   two   separate  tracts  of 

land,  each  an  acre  in  size.     Every  spring  the  two  farmers 

owning  these  tracts  go  out  to  plant  their  grain.     They 


41  o  American  Economic  Life 

may  use  the  same  quality  of  fertilizer,  the  same  kind  of 
grain,  the  same  type  of  plow,  and  they  may  have  the  same 
efficiency  in  their  labor  force.  In  the  fall,  one  farmer  reaps 
twenty  bushels ;  the  other  fifteen.  To  what  may  we  at- 
tribute this  difference  in  yield  of  five  bushels  per  acre? 
In  all  production  there  are  three  factors, — land,  labor, 
and  capital.  On  these  two  acres  the  capital  and  labor 
are,  by  assumption,  respectively  identical.  This  being  the 
case,  there  remains  but  the  third  factor  to  which  we  may 
attribute  this  extra  growth  of  five  bushels.  That  is  land. 
The  extra  return  of  five  bushels  is  the  income  which  we 
attribute  to  the  better  acre  because  of  its  superiority  over 
the  poorer  one.  Such  an  increase  is  termed  "  rent."  Thus, 
rent  arises  because  "  land  "  aids  man  unequally  in  pro- 
duction. In  one  place  it  yields  fifteen  bushels,  in 
another  twenty.  This  difference  in  the  yield  constitutes 
the  rent. 

Again,  let  us  picture  to  ourselves  two  retail  stores  of 

equal  attractiveness  so  far  as  the  buildings  and  goods  are 

concerned,  and  each  equally  efficient  in  labor 

From  dtffer-  ^         * 

ences  of  and  management.  One  is  located  on  the  out- 
ocatton.  gfcjytg  or  edge  of  the  business  district ;  the  other 
is  near  the  center  of  one  of  the  busiest  thoroughfares. 
At  the  end  of  the  year,  the  net  return  of  the  one  store 
may  be  one  thousand  dollars,  while  the  net  return  of  the 
other  may  be  two  thousand  five  hundred  dollars.  To  what, 
then,  may  we  attribute  this  difference  in  earning  power 
amounting  to  fifteen  hundred  dollars  per  annum?  The 
labor  is  equally  efficient;  the  physical  equipment  of  the 
stores  is  similar.  The  difference,  then,  may  only  be  at- 
tributed to  the  third  factor  in  production,  namely,  land. 
The  income  which  we  must  attribute  to  this  second  store, 


The  Theory  of  Rent  411 

because  of  its  superiority  in  location  over  the  poorer,  we 
therefore  call  economic  rent. 

Thus  it  may  be  clearly  seen  that  the  basis  of  rent  is  found 
in  some  form  of  land  productivity.  Without  productivity, 
land  would  not  be  a  factor  in  creating  wealth,  The 
and  rent  would  not  exist  as  one  of  the  shares  conclusion, 
in  distribution.  In  the  first  illustration,  the  extra  pro- 
ductivity resulted  from  superior  fertility,  which  gave  rise 
to  rent;  while,  in  the  second  illustration,  the  additional 
productivity  was  the  result  of  superior  location,  which 
again  produced  rent.  Of  course,  superiority  in  productivity 
may  be  the  result  of  a  combination  of  both  fertility  and 
location,  as  is  the  case  with  trucking  lands  near  great 
cities.  Since  rent  arises  from  differences  in  the  produc- 
tivity of  land,  we  arrive  at  the  conclusion  that  the  rent  of 
any  given  piece  of  land  will  be  the  difference  between  its 
yield  or  productivity  and  that  of  the  least  valuable  land 
taken  as  a  basis  of  comparison. 

Grades  of  Land.  —  The  fact  that  lands  vary  in  their 
productiveness  is  seen  in  city  as  well  as  in  country  districts. 
In  the  center  of  every  great  city,  for  example,  The  usual 
is  the  most  valuable  land,  usually  devoted  to  &&de*- 
business  purposes.  Outside  this  business  district  we  find, 
roughly  speaking,  the  circular  belt  of  the  residential  dis- 
trict, which,  though  it  has  not  quite  the  high  social  value 
of  the  business  section,  still  plays  an  important  part  in  the 
use  that  man  makes  of  land.  Then,  beyond  the  confines 
of  the  city,  is  the  land  devoted  to  truck  farming;  still 
farther  out  lie  lands  devoted  to  general  farming,  and  to 
grazing. 

There  may  still  be  land  lying  beyond  the  grazing  land, 
which  is  least  desirable  for  any  of  the  uses  to  which  man 


412  American  Economic  Life 

may  put  land,  but  which  serves  to  catch  the  overflow 
of  population,  and  is  used  by  the  less  fortunate  members 
"  No-rent "  of  society  who  are  willing  to  go  on  this  poor  out- 
land.  lying  land  and  work  there  for  a  bare  living.     This 

last  type  of  land  has  earned  the  name  in  economics  of  "  no- 
rent  "  land,  —  a  term  which  implies  that  a  man  working 
on  such  land  will  merely  get  enough  from  his  labor  to  allow 
himself  his  daily  wage  and  a  sum  sufficient  to  pay  for  the 
use  of  the  simple  tools  and  seed  that  he  may  need  in  culti- 
vating it.  Its  fertility  is  so  low  that  when  a  definite  re- 
turn from  the  land  is  set  aside  to  pay  the  wages  of  labor 
and  the  interest  on  capital,  there  is  nothing  left  for  rent. 
Hence  the  expression  "  no-rent  "  land. 

Broadly  speaking,  that  class  of  land  which  has  the  highest 
social  value  will  yield  the  largest  amount  of  rent,  and,  in 
„  each  class,  that  land  which  is  superior  will  yield 

How  rent  '  r  J 

varies:  the  higher  rent.     Accordingly,  all  land  used  for 

Between         business  purposes  yields  a  greater  income  than 

UTitilCS 

land  used  for  residential  purposes.  This  latter, 
in  turn,  yields  more  than  land  used  for  trucking,  while 
trucking  land  yields  more  than  land  used  for  farming. 
Again,  farming  land  is  more  valuable  than  land  used  for 
grazing,  which,  in  its'  turn,  brings  in  a  higher  return  than 
"  no-rent  "  land. 

It  is  apparent,  however,  that,  though  this  general  scheme 
of  gradation  of  the  size  of  rents  holds  good,  there  are  many 
Within  a  variations  in  rent,  and  that  no  two  pieces  of  land 
grade.  m  fae  same  belt  pay  exactly  the  same  amount  of 

economic  rent.  Hence,  we  speak  of  the  poorest  land  of  each 
rent-paying  belt  — the  marginal  land — as  receiving  a  mar- 
ginal rent.  If  we  take  this  poorest  land  as  our  basis,  better 
land  in  the  same  class  must  pay  a  higher  rent  due  to  its  su- 


The  Theory  of  Rent  413 

periority.  This  additional  rent  is  called  the  differential  rent, 
so  that  in  theory  all  land  which  is  better,  to  however  small 
a  degree,  than  the  poorest  land  in  the  belt  pays  a  rent  com- 
posed of  these  two  elements,  —  a  sum  equal  to  the  amount 
paid  for  the  poorest  land  of  its  class,  called  marginal  rent, 
and  an  additional  sum  proportionate  to  its  superiority 
over  that  land,  called  differential  rent.  The  two  together 
equal  the  economic  rent. 

To  illustrate,  one  can  imagine  a  piece  of  land  just  on  the 
margin  of  the  trucking  belt  adjacent  to  the  general  farming 
land.  It  is  the  poorest  land  used  for  truck  farming  and 
yields  a  rent  of  twenty-five  dollars  an  acre.  Half  a  mile 
nearer  the  city  there  may  be  a  second  farm  which,  because 
of  its  superiority,  will  have  to  pay  an  additional  sum  of 
ten  dollars,  making  its  full  rent  the  sum  of  the  marginal 
and  differential  rent,  or  thirty-five  dollars.  Still  farther 
in  toward  the  city  we  can  conceive  of  the  very  best  land 
used  for  this  purpose  lying  adjacent  to  the  suburban  dis- 
trict. This  farm,  being  near  to  the  city  markets,  will 
have  to  pay  an  even  greater  differential  rent,  perhaps  fifteen 
dollars,  making  in  all  a  total  economic  rent  of  forty  dollars. 

If,  now,  we. go  even  farther  toward  the  city,  we  immedi- 
ately pass  into  the  next  belt  in  our  illustration,  the  residen- 
tial. The  poorest  land  used  for  this  purpose  The  generai 
gives  us  the  new  marginal  rent  for  that  belt.  It  ******&• 
is  obvious,  however,  that  the  entire  rent  paid  for  the 
poorest  or  marginal  land  in  this  belt  must  be  a  little  higher 
than  that  paid  for  the  best  land  of  the  next  lower  or  truck- 
ing belt.  If  this  were  not  so,  the  land  in  question  would 
be  put  to  truck  farming  again,  because  it  would  yield  by 
that  method  a  larger  return.  As  a  result,  we  have  this 
general  principle  running  throughout  all  rents,  —  the  rent 


414 


American  Economic  Life 


of  the  marginal  land  of  the  next  higher  belt  is  always  a 
little  greater  than  the  rent  of  the  marginal  land  of  the  next 
lower  belt  plus  its  greatest  differential  rent. 

This  entire  theory  of  rent  is  usually  illustrated  by  the 
following  diagram: 


The  horizontal  line  represents  the  different  grades  of 
land,  while  the  vertical  lines  show  their  varying  produc- 
Expianation  tivity.  From  this  diagram  we  are  enabled  to  see, 
of  diagram.  noj-  oniy  the  varying  values  of  the  different  classes 
of  lands,  but  also  the  varying  values  of  different  lands 
within  the  same  class.  For  example,  at  one  end  of  the 
horizontal  base  we  have  land  A,  the  most  productive  land, 
in  the  most  valuable  grade,  with  a  productivity  represented 
by  AO,  of  which  PO  is  rent.  At  the  other  end  we  have 
land  F,  the  least  productive  land  in  the  lowest  rent-paying 
belt,  with  a  productivity  represented  by  FJ,  of  which  IJ  is 
rent.  This  land  F  is  the  marginal  land  of  the  lowest  rent- 
paying  class  and  its  rent  (IJ)  is  marginal  rent.     A  little 


The  Theory  of  Rent  415 

farther  up  in  this  grazing  land,  we  find  that  land  M  has  a 
productivity  of  ML  and  that,  consequently,  it  has  a  differ- 
ential rent  of  KL  above  the  marginal  rent  NK.  Altogether 
this  land  M  has  an  economic  rent  of  NL,  which  represents 
the  sum  of  both  the  marginal  and  differential  rent. 

So  far  we  have  applied  the  law  of  rent  to  only  one  kind 
of  "  land,"  namely,  the  fields.  It  is,  however,  applicable 
to  other  forms  of  land,  such  as  mines,  forests,  Qth^ 
and  water  power.  For  example,  the  marginal  applications 
water  power  would  be  the  poorest  rent-paying  ofte  au 
water  power  that  could  be  commercially  used  for  a  certain 
purpose,  as  the  running  of  a  sawmill.  A  larger  and  stronger 
stream,  capable  of  being  used  for  the  same  purpose,  would 
yield  a  greater  return  of  sawed  lumber.  This  additional 
income  secured  in  this  manner  would  represent  the  differen- 
tial rent.  Were  there  a  source  of  water  power  just  yielding 
a  return  large  enough  to  pay  for  the  machinery  used  in  har- 
nessing it  and  the  labor  needed  in  operating  it,  it  would  cor- 
respond to  "  no-rent  "  land,  and  might  well  be  called  "  no- 
rent  "  water  power.  In  a  similar  manner,  this  same  fun- 
damental principle  of  economic  rent  may  be  applied  to 
mines,  forests,  and  other  gifts  of  nature. 

According  to  these  principles,  land  takes  one  great  por- 
tion of  the  wealth  of  society  in  the  form  of  rent.  In  any 
advanced  civilization  the  share  of  wealth  dis- 

•1       •  i  i        1   •        1       r  r  The  daneer- 

tnbution  that  goes  to  land  in  the  form  of  rent 
is  always  rising.  In  young  and  newly  settled  countries, 
where  natural  resources  are  abundant  and  unappropriated, 
the  amount  of  wealth  that  goes  to  land  is  correspondingly 
small.  However,  as  population  increases  and  resources 
are  utilized,  the  landlord  class,  under  the  system  of  private 
property,  naturally  appropriates  a  larger  and  larger  share 


4i 6  American  Economic  Life 

of  wealth.  This  higher  rent  may  result  from  the  normal 
increase  in  land's  productivity  which  is  brought  about  by 
extending  the  margin  of  cultivation.  However,  it  is  possible 
for  the  landlord  class  to  divert  to  themselves,  through  their 
monopoly  power,  a  still  larger  portion  of  the  wealth  of 
society.  In  the  United  States  there  is  little  doubt  that, 
in  the  past,  this  monopoly  power  has  been  so  exercised, 
and  that  the  landlord  has  sometimes  taken  not  only  what 
the  land  has  earned  through  its  extra  productivity,  but 
that  he  has,  in  addition,  through  his  control  of  prices, 
taken,  as  so-called  rent,  more  than  the  land  has  earned. 
Should  this  monopoly  of  natural  resources  continue  \in- 
checked,  the  land-owning  class  would  appropriate  a  great 
mass  of  wealth  which  the  land  itself  did  not  actually 
produce. 

QUESTIONS   FOR  RECITATION 

i.  Define  rent.  Give  illustrations  of  its  correct  and  incorrect 
use. 

2.  Show  how  economics  puts  "new  wine  into  old  bottles." 

3.  Name  the  two  forms  that  rent  may  take.  Give  an  example 
of  each. 

4.  How  is  the  land  user,  when  he  is  not  the  land  owner,  affected 
by  the  payment  of  rent?  Contrast  Ireland  and  France  in  this 
respect. 

5.  Is  the  "tenant-system"  of  land  tenure  in  operation  in  Eng- 
land ?     In  the  United  States  ?     What  difference  does  this  make  ? 

6.  Give  illustrations  of  how  rent  arises  from  differences  in  pro- 
ductivity based  (1)  on  fertility,  (2)  on  location. 

7.  What  will  the  rent  of  any  given  piece  of  land  depend  upon? 

8.  Describe,  in  order  of  importance,  the  five  grades  of  rent-pay- 
ing land. 

9.  Explain  the  meaning  of  "no-rent"  land.  Is  this  land  capa- 
ble of  any  productivity?  What  becomes  of  its  return?  Are  there 
any  such  lands  in  the  United  States  ? 


The  Theory  of  Rent  417 

10.  Show  how  the  productivity  of  rent-paying  lands  varies.  What 
becomes  of  the  extra  productivity  in  each  case  ? 

n.  Show  how  rent  varies  in  a  given  belt  of  land.  Illustrate 
from  the  returns  on  truck  farms. 

12.  Define  (1)  marginal  rent;  (2)  differential  rent;  (3)  eco- 
nomic rent. 

13.  Explain  the  general  principle  running  throughout  all  rents. 

14.  Why  are  the  central  residential  districts  of  great  cities  being 
invaded  by  business  houses  ? 

1 ; .   Explain  fully  the  entire  theory  of  rent  by  means  of  a  diagram. 

16/.  Apply  the  theory  of  rent  to  mines  or  water  power. 

i7.\Why  do  rents  increase  with  advancing  civilization?  What 
effect  .las  this  increase  upon  social  income  ? 

1?  vIs  productivity  or  monopoly  power  the  determinant  of  rent? 
Why>, 

19.  How  may  monopoly  power  affect  the  payment  exacted  for 
the  use  of  land  ?    How  may  society  overcome  this  danger  ? 

PROBLEMS   FOR  DISCUSSION 

1.  With  whose  name  is  the  theory  of  rent  most  closely  associated  ? 
Discuss  his  life  and  work. 

2.  What  is  the  relation  between  the  law  of  diminishing  returns 
and  the  theory  of  rent  ? 

3.  Do  the  governments  of  other  countries  own  land?  Would 
it  have  been  better  for  the  United  States  to  have  retained  the  owner- 
ship of  its  land  than  to  have  given  it  away  ?     Why  do  you  think  so  ? 

4.  Why  is  rent  called  an  "unearned  increment"? 

5.  How  does  rent  arise  ?  Would  rent  disappear  if  land  were  un- 
limited in  amount  and  of  equal  value  ?     Defend  your  position. 

6.  What  is  meant  by  "free  land"?  Is  there  any  such  land  in 
the  United  States?    If  so,  why  don't  we  all  make  use  of  it? 

7.  What  would  be  the  effect  upon  rent  if  new  land  were  dis- 
covered ?     If  a  railroad  opened  up  a  new  country  ? 

8.  Is  the  "rent"  of  a  down- town  New  York  office  rent  in  the 
economic  sense  of  the  term  ?     Why  not  ? 

9.  Are  tenants  very  likely  to  make  permanent  improvements 
upon  rented  land  ?    Why  do  you  think  so  ? 


4i 8  American  Economic  Life 

10.  What  is  the  difference  between  economic  rent  and  com- 
mercial or  contract  rent  ? 

ii.  Can  you  give  examples  of  a  rise  of  commercial  rent?  Of  a 
decrease  ?    State  the  causes  in  each  case. 

12.  Is  the  income  yielded  by  permanent  improvements  on  lane1 
rent  or  interest  ?    Why  ?  g 

13.  How  has  the  advent  of  trolley  cars  and  automobiles  affected 
rent? 

14.  Do  high  rents  cause  high  agricultural  prices  or  do  high  agri- 
cultural prices  cause  high  rents  ?     Explain  your  answer. 

15.  What  case  of  unearned  increment  in  land  values  can  yoi  cite? 

16.  State  the  advantages  and  disadvantages  of  private  owner- 
ship in  land.  r 

SUPPLEMENTARY  READING 

Carver,  T.  N.     The  Distribution  of  Wealth,  Chap.  V. 

Clark,  J.  B.     Distribution  of  Wealth,  Chap.  XIII. 

George,  Henry.     Progress  and  Poverty,  Book  III,  Chap.  II. 

Hobson,  J.  A.     The  Economics  of  Distribution,  Chap.  IV. 

Patten,  S.  N.     Dynamic  Economics,  pp.  144-147. 

Ricardo,  David.     Principles  of  Political  Economy,  Chap.  II. 

Walker,  F.  A.     Land  and  Its  Rent. 


CHAPTER  XLI 
The  Theory  of  Wages 

I.   Nature  of  wages 

i.   Meaning  of  wages  : 

a.  Money  wages 

b.  Real  wages 

2.  Necessity  of  money  wages 

3.  What  wages  include 

II.    Groups  of  laborers 

1 .  Four  main  classes  : 

a.  The  leaders 

b.  The  salaried  and  professional  men 

c.  The  skilled  laborers 

d.  The  unskilled  workers 

2.  Why  non-competing 

III.   What  determines  group  wages 

1.  Supply  and  demand 

2.  Productive  power : 

a.  Meaning  of  productivity 

b.  Importance  of  this  principle 

c.  Marginal  productivity 

3.  Monopoly  power : 

a.  Its  meaning  and  use 

b.  How  wages  vary  with  it 

4.  Why  group  wages  are  stable  : 

a.  The  progressive  advance 

b.  Children  move  up 

5.  The  conclusion 

Nature  of  Wages.  —  In  the  distribution  of  wealth,  the 
term  wages  is  used  to  represent  the  share  of  the   social 

419 


420  American  Economic  Life 

income  that  labor  receives    for   its   part   in   production. 

Wages  are  therefore  the  return  on  labor,  just  as  rent  is 

the  return  on  natural  resources.     Since  land  and 

Meaning 

of  wages:      labor  were  the  two  original  factors  of  produc- 

Money  tion,  rent  and  wages  were  the  original  Claim- 

wages. 

ants  in  the  distribution  of  the  early  social 
income.  We  have  seen  that  the  development  of  the  capital- 
istic regime  introduced  another  element  in  production, 
and,  therefore,  another  share  in  the  distribution  of  the  total 
product  called  interest.  Our  concern  now,  however,  is 
with  wages,  —  labor's  share  of  the  wealth  of  society.  This 
share  that  labor  receives  is  popularly  estimated,  like  the 
other  shares,  in  terms  of  money.  The  value  of  labor's 
products,  just  as  the  value  of  all  other  products,  is 
measured  through  the  medium  of  money ;  and,  when 
the  laborer  speaks  of  wages,  he  therefore  thinks  of  the 
money  wages  he  receives.  Money  is  the  accepted  form 
in  which  wages  are  paid,  because  money  is  the  universal 
measure  of  all  economic  values. 

It  must  be   remembered,   however,   that   money  itself 
is  only  the  measure  of  value.     That  is,  back  of  money 

there  must  be  some  actually  created  economic 

Real  wages.  .  .  .    .        ,  . 

goods.  These  goods  constitute  labor  s  real 
wages.  The  term  "  money  wages  "  is  but  a  symbol  and 
merely  stands  for  the  goods  for  which  the  money  may  be 
exchanged.  In  modern  society,  the  laborer  could  not 
usually  live  upon  the  goods  he  helps  to  produce,  and  he  is, 
therefore,  very  glad  to  receive  money  wages.  But  his  real 
wages  are  represented  by  the  purchasing  power  of  his 
money  wage.  Indeed,  if  there  were  no  money,  there  would 
still  be  wages,  because  labor  would  still  produce  and  be 
entitled  to  a  reward  for  its  part  in  production.     In  this 


The  Theory  of  Wages  421 

case,  wages  would  be  received  in  the  form  of  actual  prod- 
ucts. 

Why  is  not  labor,  to-day,  paid  in  the  form  of  actual 
products?  Everywhere  we  find  labor  not  receiving  the 
goods  it  actually  produces,  but  being  paid  wages  Necessity 
in  the  form  of  money.  Why  has  it  become  of  money 
necessary  for  society  to  adopt  this  uniform  wage  w  ge 
system  for  the  payment  of  labor?  The  productive  pro- 
cesses of  modern  society  are  highly  complicated.  There 
is  no  longer  a  simple,  direct  relation  between  labor  and 
the  materials  of  production,  and,  consequently,  the  laborer 
no  longer  receives  the  actual  goods  he  creates.  A  great 
intermediary  class,  known  as  employers,  has  grown  up  in 
industrial  society.  This  class  owns  the  tools  of  produc- 
tion, offers  the  laborer  employment,  receives  the  product, 
and,  in  exchange,  gives  him,  through  a  uniform  wage  sys- 
tem, a  certain  sum  of  money  called  wages.  The  pay- 
ment of  money  wages,  however,  should  not  obscure  the 
real  relation  between  labor  and  the  product  it  creates. 

Another  important  consideration  to  bear  in  mind  in  a 
discussion  of  the  nature  of  wages  is  the  inclusive  character 
of  the  term.     Not  merely  physical  laborers  re-  What 
ceive  wages.     Since  wages  are  the  reward  of  labor,  wages 
and  since  labor  is  industrial   effort,   the  term  mcu  e- 
wages  applies  to  the  rewards  of  industrial  activity,  whether 
mental  or  physical.     It   is,  therefore,  a  great  mistake  to 
confine  the  term  wages,  in  our  thinking,  merely  to  the  re- 
turn on  physical  labor.     Wages  is  just  as  broad  as  labor, 
and  we  shall  find  that  there  are  several  well-defined  groups 
of  labor,  each  one  of  which  receives  some  form  of  wages. 
In  these  upper  groups  it  is  sometimes  customary  to  speak 
of  the  return  as  salary,  fee,  or  compensation.     However, 


422  American  Economic  Life 

the  term  wages  includes  these  returns,  so  that  the  salaried 
architect  or  the  public  official,  as  well  as  the  office  boy  or 
the  fireman,  is  the  recipient  of  wages.  In  fact,  in  the  United 
States  perhaps  nine-tenths  of  those  gainfully  employed 
receive  wages,  so  that  our  working  population  may  well 
be  described  as  a  wage-earning  group. 

Groups  of  Laborers.  —  Since  wages  include  the  incomes 
of  so  many  different  laborers,  it  is  necessary  to  classify 
Four  main  laborers  according  to  wages  received.  In  the 
classes.         nrst  ciass  are  ^e  ieac}ers  —  the  men  and  women 

of  greatest  productive  capacity.  This  group  includes 
the  brain  workers  of  largest  wage-earning  power,  such  as 
high  salaried  executives,  authors,  and  inventors.  Next 
to  these  comes  the  large  body  of  successful  salaried  and 
professional  men  who  stand  out  prominently  in  every 
community.  The  recognized  physician,  lawyer,  or  educator 
as  well  as  the  salaried  engineer  or  expert  accountant  may 
be  included  in  this  group.  The  next  class  of  laborers 
is  made  up  of  the  great  mass  of  skilled  workers  who  have 
received  some  form  of  special  training.  Not  only  carpenters 
and  mechanics,  but  skilled  draughtsmen  and  typists  are 
members  of  this  class.  Finally,  there  is  the  horde  of  un- 
skilled workers  that  range  all  the  way  from  the  peddler  to 
the  immigrant  street  cleaner.  These  last  two  classes  merge 
imperceptibly  into  each  other,  and  the  laborers  forming 
the  connecting  link  are  often  spoken  of  as  semiskilled 
workers. 

The  division  of  labor  into  these  groups  may  be  observed 
in  almost  every  community.  Professor  Giddings  has 
Why  non-  brought  out  the  basic  differences  in  these  groups 
competing,  ^y  characterizing  them  as  (i)  the  responsible 
mental,   (2)    the   automatic   mental,  (3)    the    responsible 


The  Theory  of  Wages 


423 


manual,  and  (4)  the  automatic  manual.  Each  group  is 
thus  well  marked  off  from  every  other  by  reason  of  the 
special  quality  essential  to  the  success  of  each  class.  Hence 
these  groups  are  practically  non-competing.  In  fact  it  is 
often  customary,  in  certain  communities,  for  the  personnel 
of  each  group  to  be  made  up  of  the  same  families  generation 
after  generation.  This,  of  course,  is  more  true  of  the 
fixed,  static  societies  of  the  Old 
World  than  of  American  civili- 
zation. We  shall  see  presently 
that  certain  forces  are  at  work  in 
new  countries  to  break  down  these 
rigid  class  distinctions.  But  even 
here  it  is  generally  true  that  these 
groups  are  so  well  marked  off  that, 
at  any  given  time,  little  competi- 
tion prevails  among  them.  It  is 
therefore  our  task  to  discover  now 
what  determines  wages  in  each  of 
these  well-defined  groups  which  may  be  represented  by  the 
accompanying  diagram. 

What  Determines  Group  Wages.  —  At  the  outset  it 
will  be  noticed  that  these  groups  of  laborers  increase  in 
size  as  they  go  downward  from  the  top  to  the  supply  and 
bottom  of  the  pyramid.  At  the  same  time  it  demand- 
must  be  evident  that,  from  the  standpoint  of  production, 
their  capacity  decreases  in  the  same  direction.  This  means 
that  the  supply  of  labor  increases  in  each  lower  group,  while 
the  demand  for  labor  increases  with  the  upward  movement 
through  the  groups.  Hence  the  law  of  supply  and  de- 
mand applies  to  labor,  as  it  does  to  economic  commodities. 
Since  wages  depend  upon  the  relation  between  the  supply 


424  American  Economic  Life 

of  labor  and  the  demand  for  it,  the  wages  of  group  (i),  the 
leaders,  will  be  inversely  as  great  as  their  number  is  small, 
while  the  wages  of  group  (4),  the  unskilled  workers,  will 
be  inversely  as  small  as1  their  number  is  great.  This  prin- 
ciple likewise  applies  to  the  other  groups  of  laborers.  We 
come  now,  however,  to  the  vital  question  in  the  explanation 
of  wages.  Why  should  the  supply  of  certain  kinds  of 
labor  be  small,  and  why  should  the  demand  for  them  be 
great?  The  answer  to  this  question  will  give  us  the  fun- 
damental reason  why  wages  vary.  This  is  found  in  the 
principle  of  productivity. 

It  is  evident  that  men  of  high  productive  capacity  can 

command  high  wages.     This  kind  of  labor  is  in  demand 

because  its  productive  power  is  great  and  its 

power:  supply  is  limited.     The  principle  of  productivity, 

Meaning  of    therefore,  plays  the  dominant  part  in  determining 

productivity.  .  . 

the  wages  that  such  a  group  01  men  receives. 
By  productivity  is  meant  the  creative  power  which  in- 
dividuals possess  in  varying  degrees  and  whereby  they 
are  able,  either  directly  or  indirectly,  to  produce  material 
wealth.  On  all  sides  there  are  evidences  of  this  kind  of 
capacity  in  workers  of  the  first  order. 

Throughout  the  whole  theory  of  wages,  this  principle 
of  productivity  must  be  constantly  kept  in  mind.     In  fact, 

it  forms  the  foundation  of  the  general  theory  of 

Importance         ...  . 

of  this  distribution.     Not  only  labor,  but  also  capital, 

depends  upon  productive  power  as  a  basis  upon 
which  each  may  claim  a  share  in  the  distribution  of  wealth. 
As  Professor  H.  R.  Seager  points  out,  "  the  law  which  de- 
termines the  division  of  the  product  between  labor  and 
capital  in  competitive  industries  for  a  society  in  a  state 
of  normal  equilibrium  is  that  each  receives  the  share  that 


The  Theory  of  Wages  425 

it  produces."  If  labor  did  not  produce  anything,  it  would 
not  be  entitled  to  anything.  Labor  is  entitled  to  wages 
because  it  has  played  a  vital  part  in  producing  wealth. 
Under  free  competition,  wages  will,  therefore,  depend  upon 
labor's  productivity,  which  decreases  as  the  groups  in- 
crease in  size. 

In  our  discussion  of  wages  it  should  be  remembered  that 
labor's  share  of  the  product  of  industry  is  fixed  theoreti- 
cally at  the  margin  of  production,  or  by  marginal  Marginal 
producers.  Wages,  like  interest,  is  therefore  de-  productivity. 
termined  independently  of  rent.  The  share  of  the  total 
product  that  labor  receives,  as  wages,  will  consequently 
vary  with  land's  marginal  productivity.  Where  this  is 
comparatively  high,  as  in  fertile,  undeveloped  lands,  labor, 
like  capital,  will  be  correspondingly  benefited.  For  this 
reason,  wages  in  the  United  States  have  been  relatively 
high,  because  the  marginal  productivity  of  its  land  has  been 
great  as  compared  with  that  of  many  other  countries.  In 
other  words,  the  richness  of  America's  natural  resources 
on  the  frontier  has  been  a  potent  cause  of  the  high  wages 
paid  to  labor  in  this  country.  As  the  richer  land  is  used 
up  or  appropriated,  labor's  share  of  the  social  income 
naturally  declines,  unless  its  supply  diminishes  or  the  de- 
mand for  labor  increases. 

To-day,  however,  in  the  absence  of  a  purely  competitive 
regime,  does  labor  receive  exactly  what  it  produces?     Does 
the  principle  of  productivity,  and  this  principle 
alone,  determine  under  present  conditions  the  power: 
wages  of  labor?     For  example^  it  is  obviously  its  meaning 

.  and  use. 

true  that  men  of  great  productive  power  com- 
mand large  wages,  yet  it  seems  equally  obvious  that  men 
sometimes  receive  more  or  less  wages  than  is  represented 


426  American  Economic  Life 

by  the  value  of  their  product.  The  wages  of  any  class  of 
labor  seems  to  depend,  not  only  upon  its  productive  power, 
but  also  upon  its  monopoly  power.  The  more  monopoly 
power  a  group  has  the  higher  will  be  its  wages.  Monopoly 
power  has  already  been  defined  as  some  unusual  power 
that  enables  the  holder  to  fix  a  price  other  than  the  com- 
petitive one.  It  is  frequently  exercised  by  the  monopolist 
when  he  controls  prices  without  regard  to  the  laws  of  com- 
petition. This  unusual  power  may  also  be  exercised  in 
behalf  of  labor,  either  individually  or  collectively.  Either 
by  acquiring  some  special  ability,  or  by  securing  power 
through  organization,  labor  may  regulate  its  price  and 
command  wages  without  any  absolute  regard  to  the  actual 
value  of  its  product.  In  both  cases,  through  an  unusual 
control  over  labor  resources,  monopoly  power,  in  addition 
to  productive  power,  determines  the  wages  paid  to  labor. 
This  dependence  of  wages  on  labor's  monopoly  power  is 
seen  when  we  examine  the  monopoly  power  of  each  class  of 
laborers.  Society  has  had  frequent  evidence  of 
varywith  the  great  monopoly  power  of  the  leaders,  and 
monopoly       of  fa  effect         n  their  mcome.     At  the  other 

power.  r 

extreme,  we  have  the  class  of  unskilled  labor 
with  minimum  wages  and  little  monopoly  power,  that  is, 
ho  unusual  power  to  control  the  price  of  its  labor.  Be- 
cause of  this  absence  of  monopoly  power,  the  cost  of  sub- 
sistence is  practically  the  determinant  of  wages  for  this 
group  of  laborers.  Above  them,  the  skilled  laborers  are 
much  better  off,  because  their  monopoly  power  is  increased 
by  group  organization.  The  group  of  salaried  and  pro- 
fessional men  secure  monopoly  power  largely  through  in- 
dividual reputation  and  initiative.  Thus  it  may  be  seen 
that,  in  all  these  cases,  group  wages  vary  not  only  with 


The  Theory  of  Wages  427 

productive  power,  but  also  with  monopoly  power.  This 
principle  determining  group  wages  applies  likewise  to  in- 
dividual wages. 

In  a  discussion  of  group  wages  there  is  another  question 
that  naturally  arises.     Why  are  group  wages  more  or  less 
stable  ?     For  example,  why  does  the  wage  of  the  why  group 
unskilled  laborer  remain  approximately  at  the  ^a??8.are 
same   level   over   long  periods   of   time?     The  Progressive 
answer  to  this  question  is  clear.     The  progres-  advance- 
sive  members  of  one  group  advance  to  the  next  higher, 
thus  relieving  an  undue  pressure  of  numbers  in  the  group 
below.     For  example,  the  great  influx  of  immigrants,  who 
have  joined  the  ranks  of  unskilled  labor  in  this  country, 
has  forced  the  American  unskilled  worker  to  seek  some 
special  training  fitting  him  for  more  skilled  labor.     His 
standard  of  living  will  not  submit  to  the  low  wages  that 
foreign  labor  accepts.     Thus  the  progressive,  who  move  up, 
make  way  for  the  newer  ones  who  come  in. 

At  the  same  time,  the  children  of  skilled  and  unskilled 
laborers,  who  are  dissatisfied  with  the  economic  position 
of  their  parents,  frequently  move  up  to  the  class  of  commer- 
cial and  professional  men.  This  general  advance,  children 
therefore,  from  one  group  to  another,  brought  movc  *** 
about  by  the  movement  of  the  more  progressive  and  younger 
elements,  results  in  a  general  mobility  of  labor  whereby 
overcrowding  in  one  group  is  minimized  and  the  wages  of 
the  various  groups  remain  more  or  less  stationary. 

From  this  presentation  of  the  theory  of  wages,  it  will  be 
observed  that  two  factors  —  productivity  and  monopoly 
power  —  are  of  prime  importance  in  determining  The 
the  wages  of  a  given  group,  or  of  a  particular  in-  conclusion, 
dividual.     If  it  were  not  for  productivity,  there  would  be 


428  American  Economic  Life 

no  wages,  and  if  it  were  not  for  monopoly  power,  wages 
would  not  be  what  they  actually  are.  Under  ideal  con- 
ditions of  pure  competition,  the  productivity  principle 
would  be  sufficient  to  explain  wages  in  any  given  case.  Each 
individual  would  receive  as  wages  that  which,  in  competi- 
tion with  others,  he  produced.  But  when  competition  is 
checked,  as  to-day  it  actually  is,  the  amount  of  wages  that 
a  group  or  individual  can  command  depends  almost  as  much 
upon  his  monopoly  power,  that  is,  his  unusual  power  to 
control  the  price  of  labor,  as  upon  his  productive  power, 
that  is,  the  wealth  he  actually  produces. 

QUESTIONS  FOR  RECITATION 

1.  Define  wages.  Do  you  expect  to  receive  wages  ?  How  could 
you  live  without  wages  ? 

2.  Explain  the  difference  between  money  wages  and  real  wages. 

3.  Show  the  effect  of  prices  on  wages. 

4.  Why  is  it  necessary  to  have  a  uniform  system  of  wage  pay- 
ment? 

5.  How  broad  is  the  term  wages  ?  Why  and  how  is  its  meaning 
sometimes  restricted? 

6.  Describe  the  four  groups  of  laborers.     Illustrate  by  diagram. 

7.  Why  do  not  the  main  groups  of  labor  compete  with  one  an- 
other? What  effect  has  this  situation  upon  the  general  question  of 
wages  ? 

8.  How  does  the  principle  of  supply  and  demand  affect  wages? 
Give  examples. 

9.  What  is  meant  by  productivity?  What  is  the  relation  of  this 
principle  to  group  wages  ? 

10.  What  is  the  " margin  of  production"?     How  does  this  affect 
wages  ? 

1 1 .  What  effect  has  competition,  within  a  group,  upon  wages  ?    Do 
we  have  such  competition  nowadays  ?     Explain  and  give  examples. 

12.  What  do  we  mean  by  "monopoly  power"  as  applied  to  labor? 
How  does  it  affect  the  wages  of  each  group  ? 


The  Theory  of  Wages  429 

13.  Why  do  the  wages  of  skilled  labor  often  remain  at  about  the 
same  level  for  long  periods  of  time  ? 

14.  How  does  the  monopoly  power  of  the  physician  differ  from  that 
of  the  carpenter?  How  does  the  monopoly  power  of  each  affect 
his  wages  ? 

15.  How  does  the  professional  ball-player  exercise  his  monopoly 
power  ?    How  does  this  affect  his  wages  ? 

16.  Explain  the  relative  importance  of  the  principles  of  pro- 
ductivity and  monopoly  power  in  the  determination  of  wages  (i)  when 
competition  is  free,  and  (2)  when  competition  is  not  free. 

PROBLEMS   FOR  DISCUSSION 

1.  Discuss  the  "wage  fund"  theory.     How  is  it  regarded  to- 
day? 

2.  What  is  meant  by  the  "Iron  Law  of  Wages"? 

3.  Who  was  Malthus  ?    What  did  he  teach  ? 

4.  What  interest  have  the  rich  in  an  abundance  of  labor? 

5.  What  is  meant  by  the  "sweating  system"?     Give  examples. 

6.  What  is  the  effect  of  public  education  on  labor's  productivity? 
On  wages  ? 

7.  Speaking  generally,  does  the  laborer  gain  or  lose  by  working 
under  conditions  of  abundance  of  land  and  capital  ?     Why  ? 

8.  If  a  factory  town  is  destroyed  by  fire,  will  wages  through- 
out the  country  be  affected  ?     State  your  reasons. 

9.  Make  a  list  of  the  factors  affecting  the  demand  for  street 
cleaners  in  Chicago  ;  a  physician  in  a  small  town ;  a  barber. 

10.  Would  you  have  to  pay  a  cook  in  an  Alaskan  gold-mining 
camp  high  or  low  wages ?    Why? 

11.  In  your  own  individual  case,  what  do  you  think  will  deter- 
mine your  wages  in  after  life  ? 

12.  If  we  had  no  money,  would  we  still  have  wages?     Why? 

13.  In  the  nineteenth  century,  why  were  wages  as  a  rule  higher 
in  the  United  States  than  in  Europe  ? 

14.  Why  did  wages  rise  in  America  during  and  immediately 
after  the  World  War?  Can  wages  rise  indefinitely?  State  your 
reasons. 

15.  Why  are  Chinese  excluded  from  the  United  States?    What 


430  American  Economic  Life 

group  of  laborers  would  be  most  affected  by  their  re-entry  into 
American  life ?    Why? 

16.  Do  the  following  receive  wages ?    Why? 
(i)  A  clergyman.  (4)  A  gambler. 

(2)  An  editor.  (5)  An  unsuccessful  inventor. 

(3)  A  ball-player.  (6)  A  public  official. 

SUPPLEMENTARY  READING 

Carver,  T.  N.     The  Distribution  of  Wealth,  Chap.  IV. 
Clark,  J.  B.     The  Distribution  of  Wealth,  Chaps.  VII,  VIII. 
Davidson,  J.     The  Bargain  Theory  of  Wages. 
Fetter,  F.  A.     Principles  of  Economics,  Chaps.  XX-XXV. 
Marshall,  A.     Principles  of  Economics,  Book  VI,  Chaps.  I-V. 
Patten,  S.  N.     The  Theory  of  Prosperity. 
Taussig,  F.  W.     Wages  and  Capital. 
Thompson,  H.  M.     The  Theory  of  Wages. 


CHAPTER  XLn 

The  Theory  of  Interest 

I.   Nature  of  interest 
i .   Its  meaning : 

a.  Definition 

b,  Examples 

2.  Kinds  of  loans 

3.  Capital  and  money 

4.  Why  interest  is  necessary  : 

a.  From  standpoint  of  saving 

b.  From  standpoint  of  efficiency 

II.   The  rate  of  interest 

1 .  How  determined  : 

a.  Supply  and  demand 

b.  Valuation  of  the  future 

2.  Why  it  varies 

3.  Monopoly  power 

III.   Source  of  the  interest  fund 

1.  The  socialist's  view 

2.  The  scientific  view 

3.  The  conclusion 

Nature  of  Interest.  —  Capital  is  also  a  factor  in  pro- 
duction, and  the  share  assigned  to  it  in  the  general  dis- 
tribution of  wealth  is  called  interest.     In  other  Its 
words,  interest  is  the  return  on  capital  and  is  meaning: 
paid  to  the  owner  of  capital  for  its  part  in  pro-  DefimHon- 
duction.     That  is,  if  an  individual  permits  his  wealth  to  be 
used  as  capital,  or  refrains  himself  from  consuming  it  un- 

431 


432  American  Economic  Life 

productively,  he  receives  interest  for  its  use.  The  lender 
may  transfer  to  the  borrower  the  actual  goods  which  the 
latter  needs  for  engaging  in  production,  or  the  money  with 
which  the  materials  and  goods  may  be  secured,  or  the 
credit  which  constitutes  a  claim  upon  the  bank,  and  which 
represents  the  purchasing  power  whereby  the  borrower 
may  secure  the  goods  he  desires.  For  this  transfer,  the 
lender  receives  a  stipulated  sum  called  interest,  over  and 
above  the  principal,  or  the  money  value  of  the  wealth  trans- 
ferred. 

Broadly  speaking,  the  returns  on  investments  constitute 

interest.     We  must  remember,  however,  that  investments, 

in  this  sense,  do  not  include  land  or  other  natural 

Examples. 

resources  which  receive  rent  for  the  part  they 
play  in  production.  Then,  too,  the  return  on  a  house  or 
building  —  not  the  lot  upon  which  it  is  built  —  is  not  rent, 
as  ordinarily  described;  this  return  is  interest  because  it 
is  paid  on  invested  capital.  Similarly,  the  returns  on 
permanent  improvements,  like  canals,  are  originally  in- 
terest ;  while  the  returns  on  stocks,  bonds,  mortgages, 
bank  deposits,  and  loans  constitute  everyday  forms  of 
interests. 

While  loans  are  usually  negotiated  for  productive  pur- 
poses, they  may  at  times  be  made  for  purposes  of  con- 
Kinds  of  sumption.  But  to  the  lender,  the  loan  is  always 
loans.  productive  because  it  is  the  means  by  which  he 

secures  interest.  Loans  for  production  take  the  form  of 
money  or  credit  through  which  capital  goods,  such  as 
factories,  machinery,  and  equipment,  are  secured.  Their 
purpose  is  to  assist  directly  in  productive  enterprise. 
Loans  for  consumption  may  be  the  result  of  extravagant 
living,  or  may  arise  from  the  necessities  of  life.     They  are 


The  Theory  of  Interest  433 

sometimes  called  personal  loans.  If  we  regard  houses 
as  "  consumption  goods "  and  not  "  capital  goods," 
mortgages  on  such  real  estate  would  be  considered  con- 
sumption loans.  Loans  may  also  be  classified  as  short- 
and  long-time  loans.  Short-time  loans  are  loans  needed 
by  business  men  and  secured  through  the  banks.  The 
name  "  call  money  "  is  usually  applied  to  them,  and  their 
rates  of  interest  fluctuate  from  day  to  day  according  to  the 
conditions  of  the  money  market.  Long-time  loans  are 
loans  secured,  for  example,  on  real  estate.  They  may 
also  take  the  form  of  railroad  and  government  bonds. 
Their  rates  of  interest  are  much  more  stable  because  of 
the  length  of  time  for  which  they  are  issued. 

It  is  important  to  bear  in  mind  that,  primarily,  the  thing 
for  which  interest  is  paid  is  the  use  of  capital,  and  that 
money  or  credit  merely  represents  this  capital,  capital  and 
We  have  seen  that  capital  is  a  part  of  wealth  money- 
used  to  produce  more  wealth.  Now  it  is  this  very  fact 
that  capital  represents  goods  engaged  in  production  that 
entitles  its  owner  to  the  payment  of  interest.  Tools, 
buildings,  machinery,  and  other  equipment  constitute 
products  of  past  industry  which  are  essential  to  the  pro- 
cess of  production,  and  for  the  use  of  which  interest  is 
paid.  On  the  other  hand,  this  fact  must  not  be  inter- 
preted to  mean  that  money  itself  is  not  at  times  a  capital 
good.  On  the  contrary,  we  have  seen  in  discussing  capital 
that  money  is  very  often  such  a  good.  The  point  to 
remember,  however,  is  that  money  derives  its  importance 
as  a  capital  good,  not  from  itself,  but  because  it  is  a  medium 
for  securing  other  capital  goods.  This  is  also  equally  true 
of  instruments  of  credit.  In  fact,  we  must  remember  that 
the  replacement  fund  —  the  fund  for  replacing  worn-out 


434  American  Economic  Life 

capital — takes  the  form  of  money  and  credit,  and  thereby 
gives  mobility  to  capital. 

Why  is  it  necessary  to  pay  interest  for  the  use  of  capital? 
Why  is  it  not  sufficient  for  the  borrower  to  return  to  the 
Why  lender  the  exact  amount  of  goods  or  money 

necessary:  advanceci  to  him?  In  other  words,  what  legiti- 
pointof  mate  reason  exists  for  the  payment  of  interest? 
samng.  ^0  answer  this  question  it  is  necessary  to  review 

the  factors  entering  into  the  origin  of  capital.  In  an 
earlier  chapter  we  have  seen  that  capital  results  from  saving 
or  abstaining  from  present  consumption.  Now  this  absti- 
nence involves  a  sacrifice,  and  man  is  loath  to  make  sacrifices 
for  nothing.  However,  if  these  sacrifices  were  not  made, 
an  individual,  especially  in  the  less  highly  developed  com- 
munities, would  be  apt  to  consume  in  the  present  whatever 
was  produced,  and  thus  no  fund  would  arise  for  the  creation 
of  capital.  Therefore,  as  an  inducement  for  him  to  save, 
and  as  a  reward  for  these  sacrifices,  he  is  offered  more  future 
value  for  his  present  wealth.  Instead  of  spending  a  thou- 
sand dollars  to-day,  he  receives  an  offer  of  a  thousand  and 
sixty  dollars  next  year.  This  surplus  of  sixty  dollars  is 
the  reward  for  his  sacrifice.  If  this  reward  were  not  made 
—  if  interest  were  not  paid  —  saving  would  not  become 
general  and  capital  would  become  increasingly  scarce. 

If  we  regard  capital  from  the  standpoint  of  efficiency, 
we  find  that  the  payment  of  interest  is  still  necessary. 
When,  in  the  presence  of  an  already  abundant 
point  of  supply  of  capital,  we  regard  the  creation  of 
efficiency.  additional  capital  as  resulting  from  greater 
efficiency  in  production,  and  not  simply  from  increased 
saving,  we  find  that  interest  must  be  paid,  not  so  much  as  a 
reward  for  present  sacrifices,  but  more  as  a  means  of 


The  Theory  of  Interest  435 

preserving  and  increasing  the  fund  of  capital.  For  example, 
the  millionaire's  capital  must  be  paid  interest  in  order  that 
it  may  be  preserved.  The  spendthrift  dissipates  the  for- 
tune of  his  ancestors,  and  young  men  with  large  fortunes 
frequently  enjoy  the  reputation  of  being  "  good  spenders.' ' 
Although  in  such  cases  it  would  be  an  exaggeration  to  speak 
of  interest  as  being  paid  for  rewarding  sacrifices,  it  is 
nevertheless  evident  that  it  is  paid  for  preserving  capital. 
Should  this  interest  not  be  paid,  the  supply  of  capital  we 
now  have  would  eventually  be  destroyed.  Therefore, 
whether  we  regard  capital  as  resulting  from  saving,  or  from 
efficiency,  the  necessity  for  the  payment  of  interest  still 
exists. 

The  Rate  of  Interest.  —  Having  examined  the  reasons 
why  it  is  necessary  to  pay  interest,  we  are  now  in  a  position 
to  consider  the  factors  determining  the  rate  of 
interest.     The  price  paid  for  the  use  of  capital  termined: 
—  the  rate  of  interest  —  depends  theoretically  Supply  and 
upon  the  same  set  of  conditions  that  determines 
price  generally,  that  is,  upon  the  law  of  supply  and  demand. 
The  rate  of  interest,  therefore,  will  depend  upon  the  amount 
of  capital  —  not  merely  money  —  as  compared  with  the 
demand  for  it.     Of  course,  the  element  that  gives  capital 
its  value  is  its  productivity.     Because  it  is  productive, 
capital  is  in  demand.     But  interest  is  paid  for  the  use  of 
capital  not  only  because  capital  is  productive,  but  also 
because  its  supply  is  limited.     The  rate  of  interest,  there- 
fore, under  conditions  of  free  competition,  will  just  be 
sufficient  to  equalize  the  supply  of  capital  with  the  demand 
for  it. 

We  may  also  consider  this  problem  of  the  determination 
of  the  rate  of  interest  from  a  psychological  point  of  view. 


43 6  American  Economic  Life 

We  have  seen  that  the  accumulation  of  capital  involves 
abstinence  and  self-sacrifice.  Consequently,  it  is  natural 
Valuation  of  f°r  man  to  value  the  present  consumption  of 
the  future.  wealth  more  highly  than  its  future  enjoyment. 
For  example,  the  present  consumption  of  a  thousand 
dollars'  worth  of  wealth  means  more  to  an  ordinary  in- 
dividual than  a  contemplation  of  its  enjoyment  a  year 
from  now.  This  is  true  because  the  future  is  so  uncertain. 
Dishonesty,  accident,  fire,  or  death  may  intervene  to 
prevent  his  actual  enjoyment  of  this  wealth  in  the  future. 
To  offset  this  discount  of  the  future,  a  premium  of  sixty 
dollars,  let  us  say,  must  be  offered  him  in  order  that  he 
may  be  induced  to  abstain  from  the  present  spending  of 
his  wealth.  This  premium  is  the  interest  paid  him,  and 
just  offsets  his  undervaluation  of  the  future.  It  is  his 
reward  for  waiting,  and  prevents  his  squandering  his  wealth 
in  present  consumption.  If  such  a  premium  in  the  form  of 
interest  were  not  offered,  few  would  make  present  sacrifices, 
wealth  would  be  immediately  consumed,  and  little  capital 
would  be  created. 

Now  it  must  be  evident  that  the  rate  of  interest  will 
vary  according  to  the  valuation  placed  upon  the  future  by 
Why  it  society.     In  any  given  community  the  rate  of 

varies.  interest  will  be  low  or  high  according  as   to 

whether  men  in  general  put  a  high  or  low  estimate  on  future 
values.  In  older  and  more  civilized  countries,  because  man 
values  the  future  more  highly,  the  rate  of  interest  is  lower 
than  in  younger  and  less  civilized  countries  where  the 
future  is  greatly  discounted.  It  is  likewise  apparent  that, 
when  the  community  as  a  whole  is  thrifty  and  places  a 
high  valuation  on  the  future,  many  people  will  abstain 
from  present  consumption  and  devote  a  large  proportion 


The  Theory  of  Interest  437 

of  their  wealth  to  productive  purposes.  This  will  cause  the 
supply  of  capital  to  be  plentiful,  while  the  rate  of  interest 
will  be  low.  On  the  other  hand,  when  people  place  a  low 
estimate  on  the  future,  they  will  consume  freely  in  the 
present  and  so  reduce  the  amount  of  wealth  devoted  to 
productive  enterprises.  This  situation  will  cause  capital 
to  become  scarce,  while  the  rate  of  interest  will  be  high. 
Therefore,  when  the  supply  of  capital  is  great  as  compared 
with  the  demand  for  it,  the  rate  of  interest  will  be  low; 
and,  conversely,  when  the  demand  for  capital  is  great 
as  compared  with  its  supply,  the  rate  of  interest  will  be 
high. 

So  far  we  have  considered  the  factors  determining  the 
rate  of  interest  under  conditions  of  free  competition. 
The  principle  of  the  productivity  of  capital  has  Monopoly 
been  sufficient  to  explain  the  phenomenon  of  P°wer- 
interest.  In  fact,  this  principle  forms  the  basis  of  the 
whole  theory  of  interest.  However,  it  must  not  be  for- 
gotten that,  in  everyday  life,  the  capitalist  attempts  to 
secure  the  highest  possible  rate  of  interest  regardless,  if 
possible,  of  the  laws  of  competition.  The  exaction  of 
usury,  for  example,  is  an  evil  as  old  as  society  itself,  and 
the  "  money-lender  "  is  still  held  up  to  scorn  and  ridicule. 
In  modern  societies,  we  have  also  the  presence  of  the 
capitalistic  monopolist,  who  is,  indeed,  much  more  danger- 
ous to  society  than  his  ancient  counterpart.  We  have 
seen  that  one  illegitimate  cause  of  the  inequalities  of  income 
has  been  attributed  to  the  exercise  of  monopoly  power  by 
the  capitalist.  Through  the  concentration  and  control  of 
large  sums  of  capital,  the  monopolist  is  sometimes  enabled 
to  secure  a  larger  share  of  the  social  income  than  the 
productivity  of  his  capital  warrants.     The  presence  of  mo- 


438  American  Economic  Life 

nopoly,  therefore,  is  one  of  the  disturbing  factors  some- 
times entering  into  the  problem. 

Source  of  the  Interest  Fund.  —  There  remains  yet  to  be 
examined  the  source  of  the  interest  fund.  Whence  comes 
The  social-  the  fund  from  which  interest  is  paid  ?  We  have 
ist'sview.  just  seen  w^y  fa  js  necessary  to  pay  interest, 
and  the  factors  involved  in  determining  the  rate  of  interest. 
But  how  does  society  secure  the  means  with  which  to  pay 
this  sum  necessary  for  the  use  of  capital?  Does  capital 
get  it  by  robbing  labor  ?  If  so,  labor  is  exploited  by  capital, 
and  that  which  should  go  to  the  laborer  in  the  form  of 
wages  the  capitalist  appropriates  as  interest.  This  view 
is  apt  to  be  popular  with  the  so-called  laboring  class. 
They  are  often  willing  to  believe  that  the  payment  of 
interest  deprives  them  of  their  full  wages.  Sometimes,  too, 
this  may  actually  occur.  When  large  dividends  are  paid 
on  "watered  "  stock,  and  when,  through  monopoly,  an 
unfair  advantage  is  taken  of  labor,  there  exists  the  possi- 
bility that  so-called  interest  is  paid  at  the  expense  of  wages. 

As  opposed  to  this  socialistic  belief,  we  have  the  scientific 
view  that  capital  creates  its  own  fund  from  which  interest 
is  paid,  just  as  labor  produces  the  wealth  from 
scientific  which  wages  is  paid.  Capital,  to-day,  plays  as 
great  and  powerful  a  part  in  the  productive 
process  as  the  other  requisites  of  production.  Interest, 
then,  may  be  paid  without  infringement  on  the  rights  of 
labor  from  the  extra  fund  of  wealth  that  capital  has  created. 
If  a  merchant,  for  example,  by  making  his  store  more  attrac- 
tive, that  is,  by  adding  to  its  capital  and  appointments, 
increases  his  business  through  the  efficiency  of  capital, 
the  extra  return  thus  resulting  furnishes  the  fund  from 
which  interest  is  paid.    Thus,  through  increased  output, 


The  Theory  of  Interest  439 

br6ught  about  by  increased  productivity  of  capital,  in- 
terest is  legitimately  provided. 

In  the  United  States,  the  productivity  of  capital  has 
been  sufficient  to  meet  the  needs  of  a  growing  civilization. 
Not  only  has  capital  produced  its  own  interest,  The 
but  it  has  of  course  also  produced  its  own  re-  conclusion, 
placement  fund.  This  it  has  been  easily  able  to  do  be- 
cause of  the  newness  of  the  country  and  the  richness  of 
its  frontier.  It  must  be  remembered  that  interest,  like 
wages,  is  fixed  at  the  no-rent  margin  of  production,  and 
that  the  productivity  of  capital  is  reckoned  as  marginal. 
If  this  margin  is  comparatively  productive,  capital  will 
likewise  be  productive.  In  the  United  States  capital  has 
been  more  than  ordinarily  productive  at  this  margin. 
Because  of  this  fact,  interest  has  been  higher  in  this  country 
than  in  Europe.  The  productivity  of  capital  has  also  been 
greatly  enhanced  in  the  United  States  through  the  effect 
of  inventions,  and  through  the  efficiency  of  the  industrial 
organization  brought  about  by  the  great  American  entre- 
preneurs. 

QUESTIONS   FOR  RECITATION 

1.  What   is   interest?      In   what   three   forms    may   capital   be 
loaned  ? 

2.  What  is  the  most  usual  method  of  borrowing  capital?    Why? 

3.  Give  several  examples  of  interest  in  everyday  life. 

4.  How   do  consumption   and  production   loans   differ?      Give 
examples. 

5.  What  is   "call   money"?     What   are   mortgages?     Govern- 
ment bonds  ?    Why  do  rates  fluctuate  for  the  first  ? 

6.  Explain  clearly  the  relation  between  capital  and  money.     For 
which  is  interest  paid  ? 

7.  Would  people  save   if  interest  were  not  paid?    State  your 
reasons.    How  would  capital  be  affected  ? 


44o  American  Economic  Life 

8.  How  can  the  payment  of  interest  be  justified  in  the  case-  of 
capital  borrowed  from  millionaires  ? 

9.  What  determines  the  rate  of  interest?    Explain  the  prin- 
ciple. 

10.  What  bearing  has  man's  valuation  of  the  future  upon  the  rate 
of  interest  ? 

11.  What  is  the  connection  between  the  valuation  of  the  future 
and  the  law  of  supply  and  demand  ? 

12.  Why  is  there  a  higher  rate  of  interest  in  Mexico  than  in  New 
England  ? 

13.  Why  was  it  necessary  for  the  United  States  government  to 
advance  the  rate  of  interest  on  the  different  Liberty  Loans  it  "floated  " 
during  the  World  War? 

14.  Explain  the  influence  of  monopoly  power  upon  the  return 
on  capital. 

15.  What  is  the  socialist's  view  of  the  source  of  interest? 

16.  What  is  the  accepted  economic  doctrine  of  the  source  of  the 
interest  fund? 

17.  Why  has  capital  been  more  than  ordinarily  productive  in  the 
United  States? 

PROBLEMS   FOR  DISCUSSION 

1.  If  private  property  in  capital  were  abolished,  would  interest 
be  necessary?, 

2.  Discuss  the  importance  of  the  principle  of  productivity  in  the 
theory  of  interest. 

3.  Show  in  detail  the  services  rendered  to  production  by  capital. 

4.  Can  any  part  of  the  earnings  of  a  bootblack  be  called  in- 
terest?    Why? 

5.  When  a  company  declares  an  unearned  dividend,  is  the  stock- 
holder getting  interest  ? 

6.  Can  law  fix  the  rate  of  interest  at  any  desired  point?  Ex- 
plain your  answer. 

7.  Why  does  the  rate  of  interest  vary  at  the  same  time  in  differ- 
ent countries  ?     In  different  businesses  ? 

8.  The  savings  of  the  American  people  average  a  billion  dollars 
a  year.     What  and  where  are  they  ?    What  return  do  they  yield  ? 


The  Theory  of  Interest  441 

9.  Is  interest  different  from  usury?  If  so,  what  is  the  differ- 
ence? 

10.  Why  has  the  rate  of  return  on  investments  often  been  ten 
per  cent  in  the  West,  seven  per  cent  in  the  Central  states,  and  five 
per  cent  in  New  York? 

11. 'It  is  said  that  interest  is  paid  for  capital,  not  for  money.  Is 
this  true  ?     State  your  reasons. 

12.  What  is  the  effect  on  the  rate  of  interest  of  a  rising  standard 
of  living  ? 

13.  What  effect  did  the  World  War  have  upon  the  rate  of  inter- 
est?    Why? 

14.  State  in  summary  form  the  theory  of  interest. 

15.  What  is  meant  by  marginal  productivity  of  capital? 

16.  Why  must  capital  produce  its  own  replacement  fund  as  well 
as  interest  ?    How  do  corporations  manage  this  problem  ? 

SUPPLEMENTARY  READING 

Carver,  T.  N.     The  Distribution  of  Wealth,  Chap.  VI. 

Clark,  J.  B.     The  Distribution  of  Wealth,  Chaps.  IX,  X,  XVII- 

XXIII. 
Ely,  R.  T.     Outlines  of  Economics,  pp.  493-524. 
Fetter,  F.  A.     Economics,  Vol.  I,  pp.  235-313. 
Johnson,  A.  S.     Introduction  to  Economics,  pp.  217-231. 
Seager,  H.  R.     Introduction  to  Economics,  Chap.  XIV. 
Taussig,  F.  W.    Principles  of  Economics,  Vol.  II,  pp.  3-43. 


CHAPTER  XLIII 

» 

The  Theory  of  Profits 

I.   General  character  of  profits 
i.   Meaning  of  profits  : 

a.  The  ordinary  meaning 

b.  The  economic  meaning 

2.  Nature  of  managing  ability : 

a.  Its  requisites 

b.  The  entrepreneur 

3.  Nature  of  profits  : 

a.  Why  the  special  term  is  used 

b.  Its  relation  to  risks 

II.   Law  of  profits 

1 .  Grades  of  entrepreneurs  : 

a.  Those  of  phenomenal  power 

b.  Those  of  unusual  ability 

c.  Those  of  ordinary  capacity 

2.  The  " no-profit"  class 

3.  Degrees  of  profits  : 

a.  How  they  are  measured 

b.  An  example  from  the  diagram 

c.  What  " no-profit"  class  receives 

d.  The  law  summarized 

4.  The  conclusions : 

a.  Under  free  competition 

b.  Under  a  monopoly  regime 

General  Character  of  Profits.  —  We  come  now  to  an 
analysis  of  one  of  the  shares  in  distribution  that,  up  to 
this  point,  in  order  to  avoid  confusion  of  thought,  we  have 
purposely  refrained  from  mentioning.     This  share  is  known 

442 


The  Theory  of  Profits  443 

as   "  profits."    Like   rent,  the  word  profits,  as  used  in 
economics,    has    a    meaning    distinct   from   that   usually 
attributed  to  it.     In  ordinary  language  the  term 
profits  is  sometimes  used  to  designate  the  total  of  profits: 
gains  of  a  man  in  business,  regardless  of  whether  Ordinary 

0  .  _         meaning. 

they  represent  rent,  or  interest,  or  wages.  For 
example,  a  small  merchant  may  own  his  land,  his  store,  and 
contribute  his  own  labor.  At  the  end  of  a  year  his  total 
gains  may  amount  to  one  thousand  dollars.  These  he 
may  consider  as  one,  and  call  the  whole  income  profits. 
But,  after  our  discussion  of  rent,  wages,  and  interest,  it 
will  readily  be  seen  that  this  loose  phraseology  would  be 
misleading  and  unsatisfactory  to  the  economist. 

In  economics,  the  word  profits  is  dissociated  from  any 
of  the  other  shares  in  distribution.  Instead,  therefore, 
of  representing  a  loose  union  of  the  other  forms  Economic 
of  income,  it  stands  for  a  distinct  return  on  a  mean™&- 
special  agency  in  production.  In  the  above  illustration, 
for  example,  the  amount  which  the  small  merchant  has 
remaining,  after  he  subtracts  from  his  sum  total  income  the 
shares  that  land,  labor,  and  capital  are  entitled  to,  is  char- 
acterized by  the  economist  as  pure  or  net  profits.  It 
represents  a  surplus  of  wealth  over  and  above  the  returns 
on  the  three  factors  of  production.  This  extra  return  is 
due  to  the  superior  managing  ability  of  the  independent 
business  man,  and  is  appropriated  by  him  for  that  reason. 
Profits,  therefore,  are  the  return  on  managing  ability. 

To  understand  more  clearly  the  character  of  profits  we 
must  thoroughly  comprehend  the  nature  of  managing 
ability.  Managing  ability  implies  two  things,  (1)  a  special 
kind  of  labor  or  ability,  and  (2)  something  to  manage. 
The  basis  of  this  special  ability  may  be  inherited  and  thus 


444  American  Economic  Life 

form  a  nucleus  for  future  development.  It  must,  however, 
be  developed.  Managing  ability  does  not  spring,  full  grown, 
Nature  of  from  the  head  of  the  would-be  manager.  Un- 
abUrty-ng  doubtedly  it  exists,  in  varying  degrees,  in  the 
itsreq-  inherent  natures  of  different  individuals.  But 
msites.  to  develop   managing  ability  up  to  the  point 

required  by  efficient  business  organization  there  is  re- 
quired great  skill,  technical  knowledge,  and  an  insight 
into  human  nature  that  result  only  from  years  of  experience 
and  special  training.  Skill,  judgment,  initiative,  insight, 
efficiency,  —  all  are  required  in  managing  ability.  Further- 
more, for  the  exercise  of  this  ability,  there  must  naturally 
be  "  something "  to  manage.  Now  this  something  is 
made  up  of  the  land,  labor,  and  capital  required  in  pro- 
ductive enterprise.  A  site  must  be  had  for  the  factory ; 
the  building,  raw  materials,  and  equipment  must  be 
provided  ;  the  labor  force  must  be  secured.  Consequently, 
managing  ability  represents  a  united  control  of  these 
factors  of  production.  It  is  not  necessary  that  the  indus- 
trial manager  own  all  the  land  and  capital  which  he  manages, 
although  it  is  perfectly  possible  for  him  to  be  the  owner  as 
well  as  the  manager.  Ordinarily  he  is  intrusted  with  the 
management  of  capital  contributed  by  hundreds  of  stock- 
holders as  well  as  of  that  furnished  by  himself. 

In  order  to  individualize  the  industrial  manager  still 
more  clearly,  the  term  entrepreneur  or  enterpriser  is 
The  applied  to  him.     In  a  general  way,  he  represents 

entrepreneur,  j-ne  independent  business  man,  and  manifests  all 
degrees  of  ability.  However,  we  are  accustomed  to  think 
of  the  entrepreneur  as  possessing  the  qualities  required  in 
the  highest  forms  of  industrial  enterprise.  Here,  in  addi- 
tion to   the  characteristics  of   managing  ability  already 


The  Theory  of  Profits  445 

mentioned,  the  entrepreneur  is  found  to  be  resourceful, 
daring,  and  even  imaginative.  Consider,  for  a  moment, 
the  qualities  required  in  the  great  railroad  builder,  or  in 
the  organizer  of  a  great  steel  industry.  These  men  must 
possess  not  only  unusual  skill  and  efficiency,  but  they  must 
be  made  of  such  stuff  as  will  remain  undaunted  in  the 
face  of  seemingly  unsurmountable  difficulties,  unmoved  by 
ignorant  or  unjust  criticism,  and  capable  of  visualizing 
great  dreams  of  empire. 

Such  is  the  entrepreneur  whose  reward  we  term  profits. 
While  we  must  always  regard  profits  as  the  return  on 
managing  ability,  we  may  view  managing  ability 
as  a  kind  of  labor,  and,  therefore,  consider  profits: 
profits  as  a  specialized  form  of  wages.  This  Why  the  term 
view  has  sometimes  been  taken,  but  it  is  found 
to  be  confusing.  It  is,  of  course,  true  that  the  incomes  of 
our  great  American  managers  are  made  up  largely  of  the 
returns  on  their  industrial  effort  in  the  form  of  organizing 
and  managing  ability.  Hence,  it  might  be  argued  that, 
since  managing  ability  is  only  another  form  of  labor  or 
industrial  effort,  its  return  in  the  form  of  profits  is  only 
another  form  of  wages.  However,  it  would  be  most  confus- 
ing to  speak  of  the  wages  of  a  fireman  and  of  the  wages  of 
a  railroad  organizer.  To  avoid  this  confusion  of  thought, 
we  differentiate  managing  ability  from  ordinary  labor,  giv- 
ing it  a  distinct  classification  as  a  separate  factor  of  produc- 
tion, and  we  apply  to  its  return  the  special  term  profits. 

If  we  are  looking  for  a  synonym  for  managing  ability,  it 
may  better  be  found  in  the  phrase  "  risk-taking."     In  fact, 
risk-taking  is  almost  synonymous  with  business  Reiation 
enterprise,   which  is   the  peculiar  field  of   the  t0  risks- 
entrepreneur.     The   independent   business   man,   i.e.    the 


446  American  Economic  Life 

entrepreneur,  is  constantly  taking  risks.  This  element  is 
eliminated  from  rent,  and  wages,  and  interest ;  but  it  is  a 
most  potent  factor  in  the  activities  of  enterprisers.  The 
enterpriser  himself  contracts  to  pay  definite  sums  for  his 
building  site,  his  factory,  and  his  labor  force.  No  element 
of  risk  enters  into  the  returns  on  these  factors.  They 
must  be  paid.  It  is  only  the  return  to  the  entrepreneur 
that  involves  the  element  of  risk.  If  he  has  had  a  successful 
year,  his  returns,  over  and  above  the  stipulated  sums  he 
has  contracted  to  pay  for  rent,  interest,  and  wages,  will  be 
large  and  his  profits  great.  If  he  has  had  a  disastrous  year, 
his  losses,  unless  covered  by  specific  insurance,  will  be  great. 
In  either  case,  when  he  assumes  the  risk,  he  accepts  the  con- 
sequence of  success  or  failure.  In  this  sense,  therefore, 
profits  may  be  said  to  be  the  reward  for  risk-taking. 

Law  of  Profits.  —  We  are  now  ready  to  consider  the 
question  of  how  profits  are  determined.     Why  should  the 

profits  of  one  industrial  manager  differ  from  the 
entrepre-       profits  of  another?     To  answer  this  question 

we  must  first  examine  differences  in  managing 
ability  upon  which  these  profits  depend.  While  managing 
ability  is  of  multitudinous  kinds  and  degrees,  entrepreneurs 
may,  in  general,  be  conveniently  grouped  into  three  or  four 
classes.  At  the  head  of  the  group  of  industrial  managers 
are  those  who  possess  phenomenal  managing  ability.  They 
stand  out  in  bold  relief  against  the  background  of  normal 
power  in  industrial  management.  Had  a  man  of  this 
phenomenal  power  in  business  a  corresponding  ability 
in  art  or  literature,  he  would  become  as  famous  as  Michael 
Angelo  or  Shakespeare.  He  is  the  genius  in  all  kinds  of 
business  enterprise.  It  is  needless  to  say  that  the  number 
of  men  in  this  class  is  extremely  limited.    Next  to  the  men  of 


The  Theory  of  Profits  447 

phenomenal  power  come  those  of  unusual  managing  ability. 
They  are  men  of  talent,  but  just  fall  short  of  possessing 
industrial  genius.  They  comprise  the  second  group  of 
foremost  industrial  organizers  and  leading  merchants  and 
manufacturers  in  the  country.  Next  to  these  come  the 
men  of  ordinary  capacity  in  industrial  management.  They 
are  successful  and  independent  business  men,  well  known 
in  their  respective  communities.  The  number  of  men  in 
this  class  is  quite  large. 

Finally,  in  the  general  group  of  entrepreneurs,  come  the 
men  of  minimum  managing  ability.  They  are  on  the 
margin  of  business  enterprise  and,  as  entre-  "No-profit" 
preneurs,  they  make  no  more  profits  than,  as  class- 
laborers,  they  would  command  wages.  Consequently  they 
hover  about  the  margin  of  business  independence,  — 
sometimes  venturing  out  for  themselves,  and,  again,  seek- 
ing employment  under  cover  of  some  one's  management. 
Under  these  conditions,  therefore,  they  may  be  said  to  pos- 
sess only  marginal  ability.  The  term  "  wages  of  manage- 
ment "  is  used  to  distinguish  their  return  from  that  of  the 
more  successful  entrepreneurs,  for  whose  return  the  term 
profits  is  reserved.  Hence,  it  is  often  customary  to  speak 
of  entrepreneurs  of  marginal  ability  as  the  "  no-profit  " 
class  of  entrepreneurs. 

The  different  grades  of  managing  ability,  and  the  profits 
they  respectively  command,  may  be  represented  by  a 
diagram  with  the  principle  of  which  we  are  already  familiar. 
From  this  diagram  it  will  be  seen  that  the  principle  which 
determines  degrees  of  profits  is  similar  to  that  determining 
differences  in  rent.  Just  as  we  have  different  Degrees  of 
grades  of  land  with  varying  productivity,  so  we  Profits- 
have    different    classes    of    entrepreneurs    with    varying 


448 


American  Economic  Life 


capacity.  As  we  measure  rents  on  the  basis  of  the  return 
on  "  no-rent  "  land,  so  we  measure  profits  on  the  basis  of 
the  return  on  the  "  no-profit "  class  of  entrepreneurs. 
For  example,  the  man  D,  in  the  diagram,  has  a  return  on 
his  effort  represented  by  the  line  DE.  Of  this  return  DE, 
LE  represents  profits  and  is  known,  in  economics,  as 
marginal  profits.  The  man  A,  however,  has  a  much  larger 
return,  represented  by  AH,  of  which  IH  is  profits.     In  both 


^^1 

PROFITS         ^^>^ 

^ ^J 

J 

GENIUS 

K 

UNUSUAL  POWER 

L 
ORDINARY  CAPACITY 

MARGINAL  ABILITY 

cases  the  return  of  these  men  on  their  managing  ability, 
that  is,  their  profits,  has  been  measured  by  using  the  return 
of  the  "  no-profit  "  class  with  marginal  ability  as  a  common 
basis  of  comparison.  It  will  be  seen,  therefore,  that  these 
men  of  marginal  ability,  used  to  represent  the  "  no-profit  " 
class  of  managers,  serve  the  same  purpose  as  the  "  no-rent  " 
land  in  the  theory  of  rent.  It  must  be  remembered,  how- 
ever, that  this  "  no-profit  "  class,  just  like  the  "  no-rent  " 
land,  has  some  return  for  its  effort;  but  this  return  is 
called  "  wages  of  management  "  to  distinguish  it  from  pure 


The  Theory  of  Profits  449 

profits.  Therefore,  the  law  of  profits  may  be  thus  sum- 
marized ;  the  profits  of  any  given  entrepreneur  will  be  the 
difference  between  his  return  and  the  return  of  the  "  no- 
profit  "  class  of  entrepreneurs. 

In    the   manner   of   their   determination   profits,    then, 
resemble  rent.     Both  are  differentials  based  on  marginal  ■ 
cost   of   production.     Therefore,    under    condi- 
tions  of   free   competition,   neither   determines  conclusions: 
prices,  because  prices' are  fixed  on  the  margin  of  Under  free 

.  .       .  .  competition. 

production  by  marginal  producers.  Under  the 
competitive  system,  pure  profits  cannot  affect  prices  be- 
cause, as  we  have  seen,  marginal  producers  receive  no  such 
profits,  but  obtain  merely  wages  of  management  for  their 
labor  and  current  rates  of  interest  for  their  capital.  Prices 
are  therefore  fixed,  theoretically,  at  the  point  where  true 
profits  do  not  exist.  The  successful  entrepreneur's  pure 
profits  depend  upon  his  superior  efficiency  and  the  superior- 
ity of  his  managing  ability  over  that  of  marginal  producers, 
or  the  no-profit  class  of  entrepreneurs.  When  competition 
is  freely  at  work  throughout  society,  profits  are  a  surplus 
of  wealth  secured  by  superior  managing  ability  in  the  pro- 
duction of  a  commodity  at  a  cost  lower  than  that  repre- 
sented by  the  price  charged  at  the  margin  of  production. 
The  superior  entrepreneur  secures  profits  when  he  sells 
goods  at  prices  representing  marginal  cost  of  production. 

Now  all  of  this  is  true  when  we  deal  with  ideal  conditions 
of   pure    competition.     When,    however,    we    consider    a 
society  in  which  monopoly  power  —  price-fixing  v  . 
power  —  is  known  to  exist,  we  have  to  reckon  monopoly 
with   an   entirely   different    set   of   conditions.   regtme- 
With  the  introduction  of  the  element  of  monopoly,  prices 
are  no  longer,  as  a  matter  of  fact,  determined  simply  at 


45°  American  Economic  Life 

the  margin  of  production.  In  a  monopoly  regime,  the 
importance  of  marginal  producers  in  fixing  price  is  of  less 
significance  than  the  monopoly  power  of  the  great  entre- 
preneurs, who  often  fix  monopoly  prices  without  any  regard 
to  the  marginal  cost  of  production,  at  the  highest  point 
consistent  with  the  greatest  monopoly  gain.  Monopoly 
profits  are  therefore  entirely  different  from  competitive 
profits.  In  discussing  "  Price  and  Monopoly,"  under 
Problems  of  Exchange,  we  have  made  frequent  references 
to  the  effect  of  monopoly  power  on  prices,  that  is,  to  mo- 
nopoly profits.  Should  this  monopoly  power  increase,  and 
should  prices  continue  to  be  forced  above  a  competitive 
level,  much  of  our  social  income  may  be  converted  into 
the  profits  of  the  entrepreneur.  Uncontrolled  monopoly 
power  is  distinctly  antagonistic  to  social  welfare,  and 
society  must  learn  to  protect  itself  against  this  social 
menace. 

QUESTIONS   FOR  RECITATION 

i .   How  is  the  term  profits  popularly  misused  ? 

2.  Distinguish  economic  profits  from  the  other  shares  in  dis- 
tribution.    Give  examples. 

3.  Why  is  profits  regarded  as  a  distinct  share  in  distribution? 

4.  Why  is  profits  a  surplus  ? 

5.  Name  some  of  the  characteristics  of  the  entrepreneur.     How 
are  these  secured  ?     Name  half  a  dozen  great  entrepreneurs. 

6.  Does  the  entrepreneur  own  the  land  or  capital  which  he 
manages  ?     Explain  your  answer. 

7.  Why  are  not  profits  considered  as  identical  with  wages? 

8.  If  there  were  no  risks,  would  there  still  be  profits?     Explain 
the  relation  between  the  two. 

9.  Why  do  profits  vary  ?     Give  some  illustrations. 

10.  Describe  the  different  grades  of  successful  entrepreneurs. 

11.  Explain  the  meaning  of  the  " no-profit"  class.    What  does 
this  class  receive  ? 


The  Theory  of  Profits  451 

12.  Draw  a  diagram,  and  explain  from  it  the  theory,  of  profits. 

13.  How  do  we  measure  differences  in  profits  ?  Why  do  we  speak 
of  profits  as  a  differential  ? 

14.  Summarize  the  law  of  profits. 

15.  Under  free  competition,  do  profits  affect  prices,  or  do  prices 
affect  profits?    Why? 

16.  How  is  the  theory  of  profits  upset  by  the  growth  of  monopoly 
power? 

17.  How  may  society  control  monopoly  profits  ?  Why  is  this  not 
done? 

18.  What  is  meant  by  "profiteering"?  Could  the  high  prices  of 
the  World  War  period  be  properly  accounted  for  on  this  basis  alone  ? 
Give  reasons. 

PROBLEMS  FOR  DISCUSSION 

1.  What  are  the  chief  elements  in  business  enterprise? 

2.  Do  unsuccessful  employers  pay  less  wages  than  those  who 
make  larger  profits  ?     State  your  reason. 

3.  What  is  the  effect  of  competition  on  profits?  Of  monopoly 
power? 

4.  What  devices  do  entrepreneurs  sometimes  employ  to  escape 
competition  ?     What  are  the  social  effects  ? 

5.  What  do  you  think  has  been  the  basis  of  most  of  the  more 
recently  acquired  large  fortunes  in  this  country?  Give  some  exam- 
ples. 

6.  The  syndicate  which  underwrote  the  securities  of  the  U.  S. 
Steel  Corporation  is  said  to  have  made  over  $40,000,000.  Was  that 
profit  ?     Do  you  think  it  was  earned  ? 

7.  Are  the  profits  of  a  business  man  a  good  measure  of  his  serv- 
ice to  society  in  the  production  of  wealth?     Defend  your  position. 

8.  Do  profits  tend  to  an  equilibrium  as  between  different  indi- 
viduals?   Different  occupations ?     Different  places?- 

9.  Is  a  restriction  of  profits  ever  justifiable  ?    Why  or  why  not  ? 

10.  What  are  the  arguments  for  and  against  an  excess-profits 
tax? 

11.  Describe  the  various  means  society  may  employ  to  distribute 
profits  more  generally  throughout  the  community. 


452  American  Economic  Life 

12.  Name  some  field  of  production  where  the  returns  are  in  the 
form  of  profits. 

13.  If  the  marginal  producer  receives  no  real  profits,  why  does  he 
continue  in  business  ? 

14.  Do  profits  resemble  any  other  share  in  distribution  ?     Why  ? 

15.  Is  the  entrepreneur  entitled  to  a  great  fortune?    Why? 

16.  What  is  the  difference  between  gross  profits  and  net  or  pure 
profits  ? 

17.  In  your  opinion,  have  any  great  fortunes  ever  been  made 
through  monopoly  profits  unfairly  secured  ? 

18.  Apply,  as  a  remedy,  the  inheritance  tax  to  the  above  prob- 
lem. 

19.  How  is  private  monopoly  different  from  public  monopoly? 

SUPPLEMENTARY   READING 

Carver,  T.  N.     The  Distribution  of  Wealth,  Chap.  VII. 
Clark,  J.  B.     The  Distribution  of  Wealth,  Chap.  VI. 
Ely,  R.  T.     Monopolies  and  Trusts,  Chap.  III. 
Ely,  R.  T.     Outlines  of  Economics,  Chap.  XXV. 
Haynes,  J.     Risk  as  an  Economic  Factor:  Quarterly  Journal  of  Eco- 
nomics, Vol.  IX. 
Meade,  E.  S.     Trust  Finance. 
Veblen,  T.     Theory  of  Business  Enterprise,  Chap.  III. 


CHAPTER  XLIV 

The  Outlook  for  Labor 

I.  Labor's  monopoly  power 

i.   Individual  monopoly  power : 

a.  Acquired  capacity 

b.  Inherited  capacity 

2.  Group  monopoly  power : 

a.  Meaning  and  example 

b.  Where  and  how  exercised 

3.  The  outlook  in  the  United  States 

II.   Labor's  power  of  substitution 

1 .  From  standpoint  of  consumption : 

a.  Meaning  and  examples 

b.  The  consequence 

2.  From  the  standpoint  of  production : 

a.  Meaning  of  mobility  of  labor 

b.  Examples  of  this  mobility 

3.  Double  effect  of  this  power  on  labor  : 

a.  As  producer 

b.  As  consumer 

III.   Relative  rates  of  increase  of  the  factors  of  production 

1.  Importance  of  rate  of  increase 

2.  Conditions  in  United  States  : 

a.  Before  the  World  War 

b.  After  the  World  War 

3.  General  conclusion 

In  concluding  a  discussion  of  the  theory  of  distribution, 
it  is  important  to  understand  the  probability  of  the  differ- 
ent shares  of  wealth  increasing  or  diminishing.     From  the 

453 


454  American  Economic  Life 

standpoint  of  social  welfare,  the  future  of  labor  is  espe- 
cially significant,  because  the  great  mass  of  people  depend 
altogether  upon  wages  for  their  support  and  material 
happiness.  In  determining  what  chance  labor  has  of  in- 
creasing its  share  in  the  general  distribution  of  social  in- 
come, it  will  be  found  that,  aside  from  the  principle  of 
productivity,  much  will  depend,  (i)  upon  the  growth  of 
labor's  monopoly  power,  (2)  upon  the  exercise  of  its  power 
of  substitution,  and  (3)  upon  its  rate  of  increase  as  com- 
pared with  that  of  the  other  factors  of  production. 

Labor's  Monopoly  Power.  —  In  the  lowest  group  of 
laborers  we  have  seen  that  there  exists  comparatively 
Individual  tittle  monopoly  power,  and  that  competition, 
monopoly  therefore,  fixes  the  wage  almost  at  the  minimum 
power.  Q£  subsistence.     In  all  the  other  groups,  however, 

monopoly  power  plays  a  considerable  part  in  determining 
the  upper  limit  of  wages.  This  monopoly  power  of  labor 
may  be  exercised  either  individually  or  collectively.  The 
individual  may  possess  this  unusual  control  over  the  price 
of  his  labor  either  as  a  result  of  special  training,  or  by 
reason  of  some  inherited  tendency  that  has  been  devel- 
oped and  cultivated.  For  example,  the  man  who  has  made 
a  technical  study  of  the  textile  business  at  home  and 
abroad,  who  has  a  thorough  grasp  of  business  detail  and 
knows  how  to  manage  large  numbers  of  men,  possesses 
by  reason  of  his  training  a  .great  monopoly  power.  This 
power  enables  him  to  command  a  salary  of  perhaps  twenty- 
five  thousand  dollars  a  year.  In  a  similar  manner  the 
man  who,  through  inherited  ability  and  later  training,  is 
able  to  draw  striking  cartoons  and  caricatures  enjoys  such 
a  great  monopoly  power  that  he  may  be  able  to  command 
a  salary  of  twenty  thousand  dollars  a  year.     The  monopoly 


The  Outlook  for  Labor  455 

power  of  the  cartoonist  was  originally  inherited,  while  that 
of  the  manager  was  subsequently  acquired ;  in  both  cases, 
however,  it  was  individual. 

Group  monopoly  power,  on  the  other  hand,  is  of  quite  a 
different  character.  In  this  case  labor  relies  for  its  con- 
trol over  wages,  not  on  great  individual  power,  Gr 
but  on  collective  action.  Group  monopoly  is  the  monopoly 
power  whereby  a  group,  through  organization,  pov 
is  able  to  control  the  price  of  labor  and  to  regulate  its  own 
wages.  For  example,  suppose  a  number  of  carpenters  are 
working  for  ninety  cents  an  hour ;  and  suppose  further 
that  there  are  no  other  carpenters  near  by,  and  that  there 
is  plenty  of  construction  work  in  the  neighborhood.  It 
occurs  to  these  men  that  if  they  unite  together  and  demand 
$1.10  an  hour  they  will  be  able  to  increase  their  wages. 
This  they  do  and,  by  their  organization,  create  a  monopoly 
power  which  enables  them  to  secure  the  additional  wage 
demanded.  Among  skilled  laborers  the  monopoly  power 
of  organization  is  everywhere  in  evidence,  and  competi- 
tion plays  a  secondary  part  in  determining  wages.  This 
monopoly  power  may  be  exercised  not  only  through  the 
union  and  strike  method,  but  also  through  minimum 
wage  laws  such  as  exist  in  Australia  and  New  Zealand. 

In  America,  there  are  many  evidences  of  the  monopoly 
power  of  labor.  From  the  standpoint  of  individual  monop- 
oly, the  emphasis  on  industrial  education  and  spe- 

.  ,         ...  ,  „  ,.,..,        *       Theout- 

cial  training  is  a  most  hopeful  indication  for  the  look  in 
future  of  labor.     Everywhere  the  necessity  for  gjjjjjf 
increased  efficiency  is  being  pointed  out  and  the 
means  of  securing  it  provided.     At    the  same    time,  the 
monopoly   of   organization   is  becoming  more   and  more 
powerful.     Men  are  beginning  to  realize  how  much  more 


456  American  Economic  Life 

can  be  accomplished  by  collective  bargaining  than  by 
individual  action.  Thus,  through  the  increase  both  of 
individual  and  group  monopoly,  labor  possesses  a  means 
of  enlarging  its  share  of  the  social  income. 

Labor's   Power   of   Substitution.  —  Another   advantage 
that  labor  enjoys  is  found  in  the  exercise  of  its  power  of 

substitution.  This  power  is  simply  the  ability  of 
standpoint  labor  to  substitute  one  good  for  another,  or  one 
sumption.      employer  for  another.     For  example,  when  the 

price  of  oil  becomes  too  high,  gas  or  electricity 
may  be  substituted.  If  the  price  of  soap  is  raised,  a 
washing  powder  may  be  used.  When  meat  rises  to  a  pro- 
hibitive figure,  some  other  form  of  proteid  diet  may  take 
its  place.  In  this  manner,  by  substituting  one  product 
for  another,  the  consumer  escapes  the  extortion  of  the 
monopolist,  and  labor,  by  forcing  prices  down,  gets  the 
benefit  of  income  that  would  otherwise  go  to  the  monopo- 
list in  the  form  of  monopoly  profits.  Labor's  real  wages 
are  increased. 

Again,  by  reason  of  its  mobility  and  monopoly  power, 
labor    may    substitute    one    employer    for    another.     By 

mobility  of  labor  is  meant  the  freedom  with 
standpoint  which  labor  moves  from  one  place  to  another, 
of  pro-  an(j  from  one  empi0yer  to  another.     In  the  davs 

duction.  . 

of  feudalism,  the  serf  was  attached  to  the  soil 
and  was  prevented  from  moving  from  place  to  place.  The 
peasant  was  born  an  agricultural  worker  on  a  great  estate, 
and  there  he  was  obliged  to  live  and  die.  To-day,  how- 
ever, in  the  United  States,  a  laborer  moves  easily  from 
place  to  place,  from  employer  to  employer,  and  even  from 
one  occupation  to  another.  If  he  is  dissatisfied  with  condi- 
tions in  one  city  or  under  one  employer,  he  seeks  employ- 


The  Outlook  for  Labor  457 

ment  in  a  new  locality,  or  under  new  leadership,  where 
the  returns  or  conditions  are  more  to  his  liking. 

An  advancing  standard  of  living  always  impels  labor  to 
seek  that  industry  or  locality  where  it  will  receive  its  great- 
est reward.     The  labor  union,  through  its  mo- 
nopoly power  of  organization,  makes  secure  this  effect  0f 
higher  standard  of  living  when  it  is  once  at-  *** power 
tained.     This   mobility   of   labor   naturally   re- 
sults in  more  or  less  uniformity  of  wages  within  the  same 
general  group  of  laborers ;   but,  nevertheless,  there  is  just 
enough  difference  in  real  wages  to  cause  labor  to  sub- 
stitute one   employer   for   another.     This  power  of  sub- 
stitution may  be  used  against  the  employer  and  in  favor 
of  labor  because,  by  reason  of  the  growth  of  labor  organiza- 
tion, the  employer  himself  cannot  substitute,  as  freely  as 
in  former  days,  one  laborer  for  another.    As  producer,  there- 
fore, labor  may  use  the  power  of  substitution,  in  conjunction 
with  its  monopoly  power,  to  fix  its  own  wages ;  while,  as 
consumer,  labor  may  use  this  same  power  to  increase  its 
income  by  preventing  the  entrepreneur  from  fixing  prices  at 
the  monopoly  point  in  order  to  swell  his  own  profits. 

Relative  Rates  of  Increase  of  the  Factors  of  Produc- 
tion. —  Still  another  element  favorable  to  the  increase  of 
wages  is  found  in  the  relatively  slow  rate  at  which  Importance 
labor  may  increase,  when  compared  with  the  of  rate  of 
other  factors  of  production.     In  order  that  the 
wages  of  labor  may  increase,  the  relative  value  of  its  share 
in  the  general  distribution  of  wealth  must,  of  course,  become 
greater.     Now,  the  value  of  the  share  of  any  factor  of  pro- 
duction, —  whether    land,    labor,    or    capital,  —  depends, 
so  far  as  these  factors  alone  are  concerned,  upon  its  rate 
of  increase  as  compared  with  that  of  the  other  factors  of 


458  American  Economic  Life 

production.  Scarcity  plays  an  important  part  in  deter- 
mining the  value  of  labor,  just  as  it  does  in  determining 
the  value  of  gold  or  silver.  If  gold,  for  example,  is  scarce, 
its  value  will  be  great,  while,  if  plentiful,  its  value  will 
decrease.  Just  so  it  is  with  labor.  If  labor  increases  at  a 
relatively  slow  rate,  its  value  as  measured  in  wages  will 
be  great,  while  if  its  rate  of  increase  is  relatively  rapid, 
its  value  will  decrease. 

Now  in  the  United  States,  during  the  past  century, 
there  were  certain  tendencies  observable  in  the  relative 
Conditions  rates  of  increase  of  land,  labor,  and  capital.  Dur- 
states*6*1  *n&  ^at  period  capital  increased  so  enormously 
Before  the  that  the  rate  of  interest  steadily  declined. 
World  War.  xhrough  the  opening  up  of  new  lands  and  the 
wonderful  improvements  in  agriculture,  land  likewise 
yielded  a  greater  and  greater  return.  However,  labor,  the 
remaining  factor  of  production,  increased  at  a  rate  which 
appeared  relatively  slow  when  compared  with  capital's 
rate  of  increase,  or  land's  rate  of  increase.  Evidence  of  this 
slow  rate  of  increase  was  frequently  found  in  utterances 
against  "  race  suicide."  In  fact,  only  through  immigra- 
tion was  the  gradual  decline  in  the  birth  rate  offset.  There- 
fore, if  during  that  period  labor's  rate  of  increase  was 
slower  than  that  of  capital  or  land,  it  was  possible,  in  the 
absence  of  exploitation,  for  labor's  share  of  the  social  in- 
come to  increase  at  a  proportionally  greater  rate  than  that 
of  the  other  factors  of  production. 

What  influence  had  the  World  War  upon  these  relative 
rates  of  increase  of  the  productive  factors?  Confining 
After  the  our  attention  solely  to  America,  and  dealing 
World  War.  on\y  wifa  ^e  obvious  facts  of  warfare,  it  seems 
evident  that  its  reaction  was  not  relatively  unfavorable 


The  Outlook  for  Labor  459 

to  labor.  Needless  to  say,  the  great  conflict  struck  at  all 
three  factors  of  production.  Natural  resources  were 
recklessly  appropriated,  capital  was  destroyed  in  spite  of 
the  increase  in  money  and  bank  savings,  and  labor  was 
diverted  from  productive  to  destructive  channels.  It  is 
safe  to  say,  therefore,  that  the  returns  on  all  three  factors 
were  unusually  affected  during  this  period.  This  fact  is 
equally  discernible  when  applied  to  the  returns  on  capital 
and  labor.  In  floating  United  States  Government  Bonds, 
for  example,  the  rate  of  interest  had  to  be  steadily  ad- 
vanced, and,  in  the  employment  of  labor,  higher  wages 
had  to  be  constantly  offered.  While  it  is  too  early  at 
present  to  obtain  a  proper  perspective  of  the  general 
problem  of  the  comparative  rates  of  increase  of  all  three 
factors  since  the  close  of  the  World  War,  labor  does  not 
appear  to  have  been  affected  in  a  relatively  unfavorable 
manner  so  far  as  its  distributive  share  is  concerned. 

Briefly  stated,  the  problem  of  distribution  may  be  thus 
summarized :  Rent  is  paid  to  the  landlord  because  of  his 
control  over  natural  resources.  Interest  goes  General 
to  the  capitalist  in  return  for  the  use  of  capital  conclusi<>n- 
in  industry.  Profits  are  paid  to  the  entrepreneur  because 
of  his  managing  ability  and  the  risks  he  undertakes. 
Wages,  finally,  are  paid  to  the  laborer  in  return  for  in- 
dustrial effort  and  in  proportion  to  his  productive  and 
monopoly  power.  But,  while  all  these  shares  are  thus 
divided  up  in  theory,  they  are  not  always  so  separately 
distributed  in  practice.  One  individual,  by  represent- 
ing several  factors  of  production,  may  receive  several 
shares  in  distribution,  while  another  individual  may  re- 
ceive but  one  share.  In  America,  this  may  be  slowly 
taking  place.     Broadly  speaking,  the  laborer  usually  re- 


460  American  Economic  Life 

ceives  only  one  of  these  shares  —  wages  —  while  the 
entrepreneur  frequently  takes  the  rest.  As  American 
society  evolves,  the  landlord  controlling  natural  resources, 
the  factory  owner  controlling  capital,  the  entrepreneur 
taking  risks,  and  the  monopolist  controlling  prices,  all 
tend  to  become  the  same  person.  Through  large  scale 
production,  one  business  interest  may  control  all  the  im- 
portant processes  of  industry  from  the  raw  to  the  finished 
product,  and,  through  its  united  control  over  land  and 
capital,  may  take  into  one  treasury  the  different  incomes 
from  several  distributive  channels. 

QUESTIONS  FOR  RECITATION 

1.  Define  monopoly  power  as  applied  to  labor.     Give  examples. 

2.  Distinguish  between  individual  and  group  monopoly  power. 
Which  is  more  prevalent  ?    Why  ? 

3.  Under  a  regime  of  pure  competition,  would  monopoly  power 
develop  ?     Prove  your  position. 

4.  How  is  individual  monopoly  power  acquired  ?  Group  monop- 
oly power  ?  In  what  group  or  groups  of  labor  is  each  chiefly  found  ? 
Why? 

5.  Do  you  think  labor  is  or  is  not  developing  too  much  monopoly 
power  at  the  present  time ?    Why? 

6.  Has  labor  more  monopoly  power  in  England  or  in  the  United 
States  ?     Why  do  you  think  so  ? 

7.  Why  are  men  in  the  public  service  discouraged  or  prevented 
from  exercising  group  monopoly  power?  Do  you  agree  with  this 
point  of  view  ? 

8.  Define  labor's  "power  of  substitution."  How  may  this  be 
used  to  labor's  advantage,  (1)  from  the  standpoint  of  production, 
(2)  from  the  standpoint  of  consumption? 

9.  Why  cannot  the  employer  use  this  power  as  effectively  as  the 
laborer  ? 

10.  From  the  standpoint  of  consumption,  what  did  the  World 
War  teach  the  American  people  with  regard  to  the  power  of  sub- 
stitution? 


The  Outlook  for  Labor  461 

11.  Why  is  the  power  of  substitution  a  two-edge  sword  in  the 
hands  of  labor  ? 

12.  What  connection  is  there  between  a  factor's  rate  of  increase 
and  its  return  ? 

13.  When  the  rates  of  increase  of  the  three  factors  vary,  which 
one  will  derive  the  greatest  relative  advantage  —  the  one  with  the 
slowest  or  fastest  rate  of  increase  ?    Why  ? 

14.  At  the  close  of  the  nineteenth  century,  how  had  the  three 
factors  relatively  increased ?    What  was  the  effect  of  this  upon  labor? 

1 5.  Has  interest  or  wages  recently  advanced  more  rapidly  ?    Why  ? 

16.  Give  a  brief  summary  of  the  general  theory  of  distribution. 

PROBLEMS   FOR  DISCUSSION 

1.  What  reasons  can  you  offer  to  explain  why  the  wages  of  women 
are  generally  lower  than  the  wages  of  men  ?     Is  this  justifiable  ? 

2.  What  conditions  fix  the  maximum  limit  to  the  rate  of  wages 
in  a  particular  case  ? 

3.  Is  there  any  connection  between  the  American  rate  of  wages 
and  American  inventions  ? 

4.  By  what  methods  is  labor  increasing  its  monopoly  power  ? 

5.  Name  the  factors  in  modern  society  which  increase  the  mo- 
bility of  labor.     Discuss  their  relative  importance. 

6.  What  effect  should  the  increased  mobility  of  labor  have  on 
wages  in  different  sections  of  the  same  country  ?     Why  ? 

7.  Ordinarily  an  increased  demand  for  a  commodity  which  is 
not  absolutely  limited  in  amount  will  result  in  an  increased  supply. 
To  what  extent  would  this  be  true  of  laborers?     Of  labor? 

8.  Cite  cases  of  monopolistic  limitation  of  labor. 

9.  Explain  the  operation  of  the  power  of  substitution. 

10.  What  factors  limit  the  power  of  the  entrepreneur  over  labor  ? 

11.  How  may  labor  force  prices  down  through  the  exercise  of  the 
power  of  substitution? 

12.  How  does  an  advancing  standard  of  living  affect  wages?  By 
what  means  is  this  accomplished  ? 

13.  Was  the  condition  of  labor  in  America  in  the  nineteenth  cen- 
tury better  or  worse  than  its  condition  in  the  eighteenth  century? 
Why? 


462  American  Economic  Life 

14.  What  promise  has  the  twentieth  century  for  labor?     Why? 

15.  What  did  Henry  George  emphasize  as  the  cause  of  poverty? 
Do  you  think  his  diagnosis  was  correct  ?     Does  rent  affect  wages  ? 

16.  Has  the  entrepreneur's  return  increased  much  in  the  last  half 
century?     Has  this  affected  wages ?     Give  your  reasons. 

17.  Point  out  the  consequences  of  the  World  War  upon  labor  and 
wages. 

SUPPLEMENTARY  READING 

Carlton,  F.  T.     The  History  and  Problems  of  Organized  Labor. 
Commons,  J.  R.     Trade  Unionism  and  Labor  Problems. 
Ely,  R.  T.     The  Labor  Movement  in  America. 
Mitchell,  J.     Organized  Labor. 
Patten,  S.  N.     Theory  of  Prosperity. 
Patten,  S.  N.    Dynamic  Economics. 


PART  SIX 
PROBLEMS  OF  ECONOMIC  REFORM 

CHAPTER  XLV 

Experimental  Programs 

I.   Profit  sharing 
i .   Its  meaning 

2.  Its  different  forms 

3.  Its  American  status  : 

a.  Some  examples 

b.  The  difficulties : 

(1)  Mobility  of  labor 

(2)  Number  of  unskilled  workers 

(3)  Financial  stress 

4.  The  outlook 

II.  Welfare  work 

1.  Its  meaning 

2.  An  example 

3.  Recent  improvements : 

a.  In  factories 

b.  In  stores  and  railways 

4.  Its  future 

III.   Cooperation 

1 .   Its  usual  forms : 

a.  Cooperative  banking 

b.  Cooperative  consumption : 

(1)  Its  English  origin 

(2)  Its  American  development 

(3)  Its  advantages 

463 


464  American  Economic  Life 

(4)  Its  difficulties 
c.    Cooperative  production 
2.   Outlook  for  cooperation 

A  study  of  American  economic  life  would  not  be  com- 
plete without  a  discussion  of  the  leading  economic  experi- 
ments and  programs  that  have,  as  their  common  purpose, 
the  improvement  and  betterment  of  the  life  of  the  individual 
and  of  the  community.  Some  of  these  are  more  experi- 
mental than  fundamental  in  character.  The  experimental 
programs  may  be  grouped  under  the  head  of  profit  sharing, 
welfare  work,  and  cooperation. 

Profit  Sharing.  —  This  attempt  to  improve  the  con- 
dition of  the  worker  originates  with  the  employer,  either 
its  from  a  sense  of  social  justice,  or  because  he  be- 

meaning.  Keves  he  will  himself  be  the  ultimate  gainer  by 
this  policy.  The  system  of  profit  sharing  guarantees  the 
worker,  in  addition  to  regular  wages,  a  specified  share  of 
the  profits  of  the  business.  In  other  words,  it  presupposes 
the  payment  of  wages,  and  then  shares  the  net  profits 
with  the  workers  in  a  certain  predetermined  proportion,  — 
the  employer  voluntarily  giving  up  part  of  his  profits  in 
order  that  the  laborers  under  him  may  participate  in  their 
enjoyment.  The  simplicity  of  profit  sharing  is  greatly 
in  its  favor. 

Profit  sharing  usually  takes  one  of  the  three  following 
forms :  (1)  the  employee  participates  in  the  ownership 
its  different  of  the  stock ;  (2)  the  employee  (chiefly  in  Eng- 
forms.  \%xA  an(j  jn  the  United  States)  is  given  extra 

compensation  in  proportion  to  his  wages  and  year's  labor ; 
(3)  the  employee  enjoys  a  system  of  deferred  participa- 
tion in  profits.  Under  this  last-named  system,  each  year 
a  percentage  of  the  profits  is  credited  either  to  the  entire 


Experimental  Programs  465 

body  of  employees,  or  to  specific  employees.  In  cases 
where  the  percentage  of  profits  is  credited  to  employees 
as  a  unit,  profit  sharing  takes  the  form  of  a  provident 
fund.  In  order  to  share  in  this  fund,  the  employee  must 
be  sick,  injured,  or  in  some  other  condition  of  need.  In 
cases  where  profits  are  credited  to  employees  individually, 
each  receives  his  share  either  when  he  attains  a  specified 
age,  or  when  he  has  remained  a  certain  time  in  the  estab- 
lishment, or  when  he  suffers  an  unusual  economic  pressure 
from  sickness  or  accident.  This  system,  extensively  em- 
ployed in  France,  has  received  little  encouragement  in  Eng- 
lish-speaking countries. 

In  the  United  States,  profit  sharing  may  be  said  to  be 
in  its  infancy.     In  the  last  quarter  of  the  nineteenth  cen- 
tury, various  experiments  in  this  field  were  begun 
by  the  A.  S.  Cameron  Company  of  Jersey  City;  can  status: 
by   the   Brewster   Carriage   Company   of   New  Some 
York;    by  the  Peacedale  Manufacturing  Com- 
pany ;   and  by  the  N.  O.  Nelson  Company  engaged  in  the 
manufacture   of   plumbing   goods.     On   the   whole,    these 
early  experiments  were  on  a  comparatively  small  scale, 
and  not  altogether  successful.     Later  much  more  progress 
was  made  in  this  direction  by  many  other  corporations, 
among  which  may  be  mentioned  the  Stetson  Company  of 
Philadelphia,   hat   manufacturers,    the   American   Rolling 
Mill   Company   of   Middle  town,    Ohio,   manufacturers   of 
sheet  metal,   and  the  United   States   Steel   Corporation. 
However,  it  was  the  Ford  Motor  Company  of  Detroit 
that  gave  this  movement  its  greatest  impetus.     As  early 
as  1 914,  this  company  announced  its  intention  of  distrib- 
uting $10,000,000  annually  among  the  workmen  and  em- 
ployees of  the  establishment   in   addition    to    their  regu- 


466  American  Economic  Life 

lar  wages.  If  this  example  should  be  followed  by  other 
great  manufacturers,  and  profit  sharing  should  be  generally 
conducted  on  such  an  extensive  scale,  the  success  of  this 
method  of  sharing  profits  would  be  instantaneous. 

However,  the  other  forms  of  profit  sharing  are  not  so 
simple  in  their  method  of  application.  Especially  do 
The  diffi-  they  present  certain  difficulties  when  applied 
cuittes.  j-0  American  workers.     To  begin  with,  from  an 

American  standpoint,  the  system  of  sharing  profits,  through 
deferred  payments,  has  an  obvious  disadvantage.  It 
implies  that  a  given  employee  will  remain  under  an  em- 
ployer for  a  long  period  of  time.  In  America,  we  have 
seen  that  this  is  frequently  not  the  case.  Labor  is  mobile, 
moving  from  place  to  place  and  from  employer  to  employer. 
This  mobility  of  labor  is  one  of  the  means  employed  for 
its  betterment.  Seldom  do  wageworkers  remain  twenty 
years  under  one  employer.  A  system  of  deferred  payments, 
however,  works  on  the  principle  that  men  will  devote 
nearly  their  whole  lives  to  one  employer. 

Again,  this  system  works  best  in  trades  where  work- 
men are  highly  skilled  and  intelligent.  In  the  average 
American  industry  a  common  labor  group  is  coming  more 
and  more  rapidly  to  the  front.  This  group  works  with 
its  hands  and  neglects  its  head.  The  deferred  payment 
system  would  not  appeal  strongly  to  its  members.  At 
best,  business  is  uncertain;  and  the  average  employee 
does  not  relish  the  idea  of  working  on  the  deferred  pay- 
ment plan  for  a  firm  which  may  become  insolvent  at  any 
time  and  in  this  manner  deprive  him  of  the  chance  to  share 
in  the  fund  of  profits. 

The  system,  sometimes  in  vogue,  of  sharing  profits  with 
employees  by  requiring  them  to  be  owners  of  the  com- 


Experimental  Programs  467 

pany's  stock  before  they  are  allowed  to  share  in  the  profits 
has  a  serious  financial  drawback.  This  plan  is  well-nigh 
out  of  the  question  for  the  lower  grade  of  wageworker 
who  has  a  family  dependent  on  him.  He  needs  all  his 
income  to  maintain  a  decent  standard  of  living,  without 
investing  part  of  it  in  the  company's  stock.  If,  however, 
he  does  succeed  in  participating  in  stock  benefits,  his  in- 
terest will  naturally  be  centered  in  that  particular  busi- 
ness so  that  his  freedom  of  action  is  curtailed.  In  fact, 
this  particular  feature  of  profit  sharing  is  rather  pater- 
nalistic and  opposed  to  the  freedom  and  mobility  of  Ameri- 
can labor. 

Nevertheless,  profit  sharing,  when  applied  to  the  worker 
in  the  most  direct  manner,  is  capable  of  producing  ex- 
cellent results.     So  long  as  the  wage  system  con- 

„       ,       .  &        ■  .,.       /  ,       Theoutlook. 

tinues,  profit  sharing  may  be  utilized  to  remedy 
many  of  the  inequalities  of  social  income.  In  fact,  this 
method  may  become  generally  employed  by  the  great 
entrepreneur  to  establish  a  true  partnership  of  labor  and 
capital  in  business.  By  this  means,  capital  secures  an 
added  interest  in  the  business  on  the  part  of  the  worker; 
while  labor  receives  a  larger  share  of  remuneration  for 
services  rendered.  When  profit  sharing  is  conducted  on 
this  principle,  it  means  higher  efficiency,  greater  loyalty 
for  the  employer;  and  keener  interest,  higher  income  for 
the  worker.  Such  a  combination  is  sure  to  be  beneficial 
to  production. 

Welfare  Work.  —  Another  economic  experiment,  much 
less  fundamental  though  far  more   common   than  profit 
sharing,  is  welfare  work.     This  is  defined  by  Pro-  Its 
fessor  John  R.  Commons  as  "  all  of  those  services  meaning- 
which  an  employer  may  render  to  his  work  people  over 


468  American  Economic  Life 

and  above  the  payment  of  wages."  Employers  have  al- 
ways done  some  welfare  work,  but  until  recently  such 
efforts  were  practically  unknown  to  the  general  public. 

With  the  advent  of  the  National  Cash  Register  Company, 

however,  and  its  attempts  to  provide  abundantly  for  the 

outside  wants  of  its  employees,  attention  was 

An  example.  x      "  ■ 

widely  attracted  to  the  good  results  of  welfare 
work.  This  company,  employing  many  skilled  and  highly 
efficient  men  and  women  in  the  manufacture  of  a  very 
complicated  machine,  decided  that  it  would  be  advisable  to 
adopt  every  means  to  develop  their  interest  in  the  com- 
pany and  to  make  them  more  efficient  workers.  In  order 
to  carry  out  this  design,  sanitation  was  bettered  and  fac- 
tory conditions  improved  in  many  directions. 

Within   the   past   few  years,   factory   construction  has 
been  revolutionized.     The  old  style  factory  was  a  build- 
ing.    The  new  style  factory  is  a  factory,  planned 

.Recent  im- 

provements:  to  serve  that  definite  purpose.  When  the  old 
In  factories  were  built,  men  wanted  a  building  in 

factories.  ■••»•■• 

which  their  employees  could  congregate  and 
work.  The  progressive  modern  manufacturer  builds  a 
structure  calculated  to  fit  the  peculiar  needs  of  his  busi- 
ness, and,  in  addition,  makes  every  provision  for  the  health 
and  safety  of  his  employees.  In  pursuance  of  this  idea, 
he  provides  sanitary  and  comfortable  buildings,  educa- 
tional institutions,  religious  centers,  insurance  funds,  co- 
operative stores,  and  means  of  recreation  after  factory 
hours. 

The  factory  does  not  furnish  the  only  instance  of  wel- 
fare work.  The  modern  department  store  is  establish- 
ing restrooms  and  improved  lavatories  and  providing 
schools,    reading    clubs,    military    organizations,    singing 


Experimental  Programs  469 

societies,  and  many  other  forms  of  social  gathering  for 
the  benefit  of  the  employees.     The  railroads,  too,  have 
done  much  good  by  providing  "  bunk  "  houses  /w 
for  employees,   when  they  are   at  the  end  of  and  ra%i- 
"  runs  "  and  away  from  home.     The  men  under  ways' 
such  circumstances  often  have   no  convenient   place   to 
go.     The  railroad,  by  furnishing  sleeping  rooms,  amuse- 
ment rooms,  books,  and  other  attractions,  provides  for  the 
material  comfort  and  welfare  of  its  employees. 

Undoubtedly  the  greater  part  of  welfare  work  is  con- 
ducted for  purely  business  reasons.  Employers  have 
found  that  it  pays.  Some  concerns,  however, 
which  enjoy  very  great  financial  advantages,  s  u  ure" 
are  able  to  carry  on  welfare  work  among  their  employees 
with  a  more  general  end  in  view.  The  United  States  Steel 
Corporation,  for  example,  spends  nearly  $6,000,000  annually 
on  this  kind  of  welfare  work.  But,  for  the  great  majority 
of  employers,  this  is  impossible.  The  feeling  in  favor 
of  welfare  work  is  undoubtedly  spreading,  and,  what- 
ever one  may  think  of  the  objects  underlying  its  establish- 
ment, its  results  are  certainly  advantageous  to  both  parties. 
Like  profit  sharing,  welfare  work  depends  upon  the  em- 
ployer for  its  initiation  and  success.  But  unlike  profit 
sharing,  welfare  work  has  taken  a  strong  general  hold  on 
American  business  men,  and  constitutes  one  of  the  mod- 
ern divisions  of  every  great  industrial  undertaking.  Its 
success  rests  primarily  upon  the  fact  that  it  is  regarded, 
not  as  philanthropy,  but  as  a  means  of  increasing  indus- 
trial efficiency. 

Cooperation.  — Under  this  head  are  included  certain 
efforts  which  the  worker  himself  has  made  to  improve 
his  own  condition.     The  American's  spirit  of  independence 


470  American  Economic  Life 

has  manifested  itself  in  initiating  various  experiments 
for  his  own  betterment,  without  depending  merely  upon 
its  usual  help  received  from  the  employer  or  from  the 
forms:  public.     One    attempt    in    this    direction   has 

been  in  the  form  of  cooperation.  From  this  standpoint, 
cooperation  means  the  association  of  persons  for  the  pur- 
pose of  joint  economic  effort.  Cooperative  enterprises 
usually  assume  one  of  three  forms:  (i)  cooperative  bank- 
ing, (2)  cooperative  consumption,  and  (3)  cooperative 
production. 

Cooperative  banking  is  an  attempt  to  secure  certain 
financial  benefits  through  associations  of  individuals  in 
Cooperative  the  form  of  insurance  companies,  building  so- 
banking.  cieties,  or  fraternal  organizations.  From  the 
organization  of  the  first  Mutual  Fire  Insurance  Associa- 
tion in  1752,  the  growth  of  this  kind  of  cooperation  has 
been  rapid  in  the  United  States.  To-day  it  is  everywhere 
prevalent  in  the  form  of  assurance  societies,  building  as- 
sociations, lodges,  and  fraternal  societies.  The  chief 
purpose  of  the  protective  organizations  is,  of  course,  to  pay 
certain  benefits  in  case  of  death,  accident,  and  sickness ; 
while  the  building  societies  enable  thousands  of  Ameri- 
cans to  purchase  their  own  homes.  All  of  these  associa- 
tions have  met  with  considerable  success. 

Cooperation  in  consumption  is  the  association  of  in- 
dividuals for  the  purpose  of  securing  certain  advantages 
in    the   purchase    of    goods.     The    cooperative 

Cooperative  "  *     *•     <%_»    j      # 

consump-  store  is  a  good  example  of  this  kind  of  coopera- 
Hon'  tion.     This  economic  experiment  had  its  origin 

in  England  among  a  few  poor  weavers  of  Rochdale,  who 
contributed  to  the  purchase  of  a  bag  of  flour.  By  this 
means,  retail  quantities  of  flour  were  secured  at  whole- 


Experimental  Programs  471 

sale  prices.  From  this  small  beginning  the  cooperative 
movement  in  England  has  grown  until,  to-day,  it  num- 
bers its  members  by  hundreds  of  thousands.  In  memory 
of  its  originators,  the  cooperative  society  in  charge  of  the 
system  is  called  the  "  Rochdale  Pioneers." 

In  America,  however,  this  movement  of  cooperative 
consumption  has  never  attained  a  like  development. 
The  numerous  experiments  undertaken  in  this  direction 
have  usually  failed  to  attain  any  permanent  success. 
For  example,  in  1845,  the  nrst  protective  union  store  was 
organized  in  Boston.  A  dozen  persons  with  "  the  faith  of 
God  in  their  hearts  "  purchased  a  box  of  soap  and  half  a 
box  of  tea.  From  this  small  beginning  grew  the  New 
England  Protective  Union,  which  rapidly  developed  into  a 
large  organization  with  four  hundred  branches.  How- 
ever, dissensions  crept  into  the  ranks,  and,  within  a  few 
years,  the  association  was  practically  non-existent.  Simi- 
larly, the  "  Sovereigns  of  Industry,''  which  like  the  "  Pa- 
trons of  Husbandry  "  grew  to  great  proportions,  made 
repeated  but  unsuccessful  attempts  to  adopt  the  Roch- 
dale system  at  its  local  centers.  Finally,  the  "  Knights 
of  Labor  "  took  the  field  and  declared  for  cooperative 
institutions.  However,  little  of  a  definite  character  was 
actually  accomplished,  and  the  order  declined  in  im- 
portance without  having  permanently  advanced  the 
cause  of  cooperation. 

The  advantages  of  consumers'  cooperation  are  quite 
evident.  In  the  first  place,  the  intermediate  trader  being 
eliminated,  his  gains  are  deducted  from  the  cost  of  market- 
ing. By  wholesale  buying,  a  member  of  the  cooperating 
group  is  able  to  secure  his  goods  at  a  reduced  price,  or  to 
share  in  a  common  surplus  at  the  end  of  the  year.     Then, 


472  American  Economic  Life 

again,  through  a  knowledge  of  consumers'  needs,  and, 
through  saving  in  advertising,  the  expenses  of  operation 
are  considerably  reduced.  It  is  also  apparent  that  the 
stores  will  be  managed,  not  for  private  gain,  but  for  the 
good  of  the  community.  The  store,  in  its  turn,  is  guar- 
anteed a  loyal  constituency. 

In  view  of  these  advantages,  it  appears  surprising  that 
consumers'  cooperation  has  not  developed  more  fully  in 
the  United  States.  However,  there  seem  to  be  four  chief 
difficulties  in  the  way  of  its  development.  First,  the 
country  is  so  large  and  the  interests  of  the  various  sec- 
tions so  diverse,  that  it  has  not  been  possible  to  develop 
such  a  general  movement  as  that  which  exists  in  Great 
Britain.  Secondly,  in  the  modern  American  city,  retail 
stores  have  been  organized  on  a  large  basis,  and  a  great 
many  of  the  petty  annoyances  and  short-sighted  policies 
of  the  old  retail  system  have  been  eliminated.  In  the 
third  place,  in  the  retail  business  in  the  United  States, 
great  private  business  interests  have  proved  to  have  ad- 
vantages in  economy  far  above  those  possessed  by  the  co- 
operative business.  Finally,  American  producers  are 
strongly  organized,  and,  in  all  probability,  by  limiting 
production  or  by  refusing  to  sell  goods  to  such  organiza- 
tions, they  would  attempt  to  cripple  cooperative  under- 
takings. 

Cooperative  production  is  an  association  of  persons  for 
joint  production,  usually  in  the  field  of  agriculture  or 
Codperative  manufacturing.  In  this  experiment,  the  co- 
produaion.  operating  parties  furnish  their  own  capital,  and 
the  income  from  the  sale  of  the  product  is  divided  among 
the  cooperating  producers.  In  America,  various  at- 
tempts have  been  made  in  this  direction.     For  example, 


Experimental  Programs  473 

at  one  time,  the  "  Sovereigns  of  Industry  "  had  thirty 
manufacturing  establishments  with  a  capital  of  nearly 
half  a  million  dollars.  The  "  Knights  of  Labor  "  also 
attempted,  with  as  little  success,  to  organize  various 
productive  enterprises,  including  boot  and  shoe  com- 
panies, clothing  companies,  and  tobacco  factories.  On 
the  other  hand,  experiments  in  productive  cooperation  in 
creameries  have  been  quite  successful.  Throughout  many 
agricultural  districts  there  exist  such  creameries,  managed 
advantageously  on  a  cooperative  basis.  With  this  ex- 
ception, producers'  cooperation  in  the  United  States  can 
not,  as  yet,  be  called  successful.  The  chief  reason  for  this 
failure  may  be  found  in  the  difficulty  of  securing  capital 
and  good  business  management  for  such  productive  enter- 
prises. 

The  advocates  of  cooperation  regard  it  as  an  unfailing 
basis  for  the  solution  of  many  problems  of  American 
economic  life.  An  impartial  analysis  of  the 
success  of  this  system  in  the  United  States  does  coopera- 
not  seem,  however,  at  present  to  justify  this 
belief.  Perhaps  the  fundamental  difficulty  in  the  way 
of  its  successful  operation  in  this  country  is  found  in  the 
still  prevalent  individualistic  attitude  of  Americans  towards 
the  problems  of  economic  life.  Therefore,  with  the  ex- 
ception of  the  success  attained  in  such  cooperative  enter- 
prises as  building  and  loan  associations,  assurance  societies, 
and  fraternal  organizations,  together  with  the  successful 
consumers'  cooperation  in  England  and  in  parts  of  America, 
the  cooperative  system  has  not  furnished  sufficient  ground 
for  the  belief  that  it  will  prove  an  immediate  remedy  for 
the  permanent  improvement  of  the  economic  condition  of 
the  American  worker.     If  cooperation  is  to  furnish  an  ade- 


474  American  Economic  Life 

quate  solution  of  economic  problems  in  American  life,  it 
must  first  succeed  in  production  ;  and  there  it  has  generally 
failed. 

QUESTIONS   FOR  RECITATION 

i.   What  is  profit  sharing?     What  is  its  purpose? 

2.  Would  the  wage  system  be  affected  by  the  principle  of  profit 
sharing  ?     Explain  fully. 

3.  Explain  the  different  methods  of  sharing  profits.  Which  is 
the  most  successful  ?     Why  ? 

4.  What  are  the  objections  to  the  method  of  sharing  profits 
through  participation  in  stock  ownership  ? 

5.  Give  examples  of  profit  sharing  in  your  own  community. 

6.  Who  has  the  greatest  profit-sharing  scheme  in  the  United 
States?  What  would  be  the  effect  of  making  this  plan  general  in 
all  American  industries  ? 

7.  What  is  the  outlook  for  profit  sharing  in  the  United  States? 

8.  What  is  welfare  work  ?     Give  examples. 

9.  Do  you  regard  this  scheme  of  social  betterment  as  *unda- 
mental  ?     Why  ? 

10.  What  criticism  has  sometimes  been  made  of  welfare  work? 
Is  it  true  ? 

11.  In  what  fields  is  welfare  work  most  highly  developed? 

12.  Explain  the  most  successful  form  of  cooperation  in  Ameri- 
can economic  life. 

13.  Explain  consumers'  cooperation.     Give  examples. 

14.  What    is    producers'    cooperation?     Why    has    it    generally 
failed  in  the  United  States  ? 

15.  What  are  some  of  the  differences  between  the  cooperative 
movement  in  this  country  and  in  England  ? 

16.  Discuss  the  future  of  the  cooperative  movement. 

PROBLEMS   FOR  DISCUSSION 

1.  What  has  been  the  success  of  profit  sharing  in  the  United 
States? 

2.  What  is  the  attitude  of  the  average  employer  toward  profit 
sharing?    Why? 


Experimental  Programs  475 

3.  What  attitude  does  the  public  take  toward  profit  sharing? 
Why? 

4.  Do  you  expect  profit  sharing  to  become  general  in  the  United 
States  ?     State  reasons. 

5.  Have  you  any  criticism  against  the  principle  of  profit  shar- 
ing? 

6.  Investigate  the  systems  of  welfare  work  which  have  been 
adopted  by  local  employers.  What  are  their  strong  points?  Their 
weaknesses  ? 

7.  If  you  were  managing  a  department  store,  what  welfare  meas- 
ures would  you  adopt  ? 

8.  What  future  has  welfare  work  ? 

9.  Can  you  make  any  general  observations  concerning  the 
likenesses  of  these  two  experiments?     The  differences? 

10.  What  are  the  reasons  for  the  success  of  cooperation  in  Eng- 
land? 

n.  Why  has  cooperation  not  been  so  successful  in  the  United 
States  ? 

12.  What  is  the  strength  of  the  cooperative  program?  What 
is  its  weakness  ? 

13.  What  steps  would  be  necessary  before  cooperation  could  be 
generally  established  in  the  United  States  ? 

14.  What  economic  forces  led  to  cooperation  among  American 
farmers  ? 

15.  What  has  forced  retail  grocers  into  a  kind  of  cooperation? 

SUPPLEMENTARY  READING 

Fay,  C.  F.     Cooperation  at  Home  and  Abroad. 

Gilman,  N.  P.     Profit  Sharing. 

Gilman,  N.  P.     A  Dividend  to  Labor. 

Hoxie,  R.  J.     Scientific  Management  and  Labor. 

Schloss,  D.  F.     Methods  of  Industrial  Remuneration. 

Taylor,  F.  W.     Principles  of  Scientific  Management. 

Webb,  C.    Industrial  Cooperation. 


CHAPTER   XLVI 

The  Program  of  Labor 

I.   Nature  of  unionism 
i.    Its  significance 

2.  Its  national  scope 

3.  Its  industrial  character 

II.    Program  of  unionism 

1 .  Higher  wages 

2.  Shorter  hours : 

a.  American  conditions 

b.  The  reasons 

3.  Improved  working  conditions 

III.   Weapons  of  unionism 

1.  The  trade  agreement 

2.  The  strike : 

a.  Its  meaning 

b.  Effect  on  labor 

c.  Effect  on  employer 

d.  Effect  on  the  public 

3.  The  boycott : 

a.  Its  meaning 

b.  Its  different  forms 

4.  Outlook  for  unionism 

a.  The  benefits 

b.  The  dangers 

Nature  of  Unionism.  —  Because  the  modern  labor  union 
relies  solely  upon  itself  to  secure  individual  prosperity 
and  group  welfare,  it  is  labor's  most  distinctive  instrument 
of  social  betterment.     Its  program  contemplates  no  vol- 

476 


The  Program  of  Labor  477 

untary  assistance  from  the  employer  in  the  form  of  shar- 
ing his  profits,  or  receiving  gratuitous  benefits  at  his 
hands.  Its  real  significance  lies  in  the  fact  that  Its  sig- 
it  is  democratic,  not  aristocratic,  and  that  it  repre-  nificance- 
sents  a  voluntary  association  of  equals  striving  themselves 
to  improve  their  own  condition.  While  the  union  was 
originally  an  experiment  and,  in  some  respects,  is  still  in 
the  formative  period,  the  movement  has  grown  to  such 
proportions  and  represents  such  definite  demands  that, 
to-day,  it  is  fast  constituting  an  actual  program  of  economic 
reform. 

Formerly,  unions  were  local  and  affected  only  a  partic- 
ular trade.  To-day,  they  are  national  and  embrace  rep- 
resentatives of  many  trades.  In  the  attempt  its  national 
to  nationalize  the  union,  the  movement  was  sc°Pe- 
first  begun  in  some  one  trade,  such  as  that  of  typographi- 
cal workers.  Gradually,  however,  it  extended  to  an  at- 
tempt to  organize  all  the  workers  of  the  country.  Thus, 
in  1 881,  the  American  Federation  of  Labor  was  established, 
and  it  has  succeeded  in  affiliating  with  it  the  majority  of 
the  trade  unions  of  the  United  States.  Its  success  in  this 
great  scheme  for  the  organization  of  labor  is  due  to  the  fact 
that  it  allows  the  local  unions  large  powers  of  control,  and 
requires  that  only  the  greater  questions  be  referred  to  the 
officers  of  the  Federation. 

A  union  which  was  composed  of  the  workers  of  one  trade, 
like  that  of  carpenters  or  bricklayers,  was  at  first  called  a 
"  trade  union."     Two  great  changes  that  took  _, 

.  °  °  Its  mdus- 

place  in  the  last  quarter  of  the  nineteenth  cen-  trial  charac- 
tury  have,  however,  made  this  term  misrepre-  ter' 
sentative  of  present  conditions.     In  the  first  place,  through 
division  of  labor   and   specialization   in  industry,   trades 


478  American  Economic  Life 

have  been  so  split  up  that  they  no  longer  exist  in  their  old 
forms.  A  man  is  no  longer  a  cabinetmaker,  but  a  "  gluer," 
ora"  lathe  man."  Then,  again,  the  influx  of  large  num- 
bers of  immigrants  and  the  growth  of  a  large  class  of  com- 
mon labor  have  made  it  necessary  for  the  trade  union,  if 
it  would  succeed,  to  take  into  its  membership  men  who 
are  not  highly  skilled  in  any  special  trade.  For  example, 
the  union  of  the  United  Mine  Workers  of  America  includes 
miners,  door  tenders,  laborers,  drivers,  trackmen,  and  other 
kinds  of  common  labor.  Thus  the  old  "  trade  "  union 
has  been  transformed  into  the  modern  "  labor  "  union  with 
a  distinctly  industrial  character. 

Program  of  Unionism.  — At  the  present  time,  the  demands 
of  unionism  are  so  clearly  formulated  that  they  may  well 
Higher  be    termed    a   definite   program.     The   union's 

wages.  activities  are  directed  chiefly  toward  the  attain- 

ment of  three  ends :  (i)  higher  wages,  (2)  shorter  hours, 
and  (3)  better  working  conditions.  It  is  also  true  that 
the  union  sometimes  attempts  to  raise  the  level  of  intelli- 
gence among  its  members,  and  to  awaken  in  them  a  realizing 
sense  of  their  responsibilities.  However,  the  chief  em- 
phasis of  the  union  is  laid  upon  higher  wages  and  shorter 
hours  of  work.  The  effect  of  the  organization  of  labor 
upon  wages  has  already  been  discussed  in  the  chapter  on 
the  Theory  of  Wages.  It  was  there  seen  that,  through 
organization,  labor  is  able  to  develop  strong  monopoly 
power.  Armed  with  this  power  of  group  monopoly,  labor 
can,  through  the  union,  make  its  demands  upon  the  em- 
ployer and,  by  securing  higher  wages,  better  its  condition. 
The  union,  through  its  monopoly  power,  is  attempting  to 
secure  a  larger  share  of  the  product  of  industry,  and  in  many 
cases,  as  in  the  building  trades,  has  met  with  marked  sue- 


The  Program  of  Labor  479 

cess.     In  this  direction,  the  work  of  the  union  is  becoming 
most  effective. 

Next  in  importance  to  the  cause  of  labor  is  the  demand 
of  the  union  for  shorter  hours  of  work.     This  has  been 
crystallized   into   the   eight-hour-a-day   slogan, 
which  in  some  countries,  especially  Australia,  hours: 
has  accomplished  notable  results.    However,  for  American 
many  workers  in  the  United  States  ten  hours  still 
constitute  a  working  day,  although  a  number  of  industries  are 
conducted  on  an  eight-hour  basis.     Saturday  half-holidays 
are  the  rule  in  most  of  the  cities,  and  it  is  becoming  more 
and  more  common  to  give  short  summer  vacations.     In 
the  United  States  it  is  generally  conceded  that  the  legis- 
latures have  the  right  to  regulate  the  working  hours  of 
children,  and  numerous  state  laws  have  been  passed  ac- 
cordingly.    In  the  case  of  women,  the  Supreme  Court  has 
decided  that  the  length  of  their  working  day  may  be  regu- 
lated on  the  ground  of  woman's  physical  inferiority.     The 
labor  of  men  cannot  be  so  easily  regulated,  unless  it  can  be 
definitely  shown  that  the  health  and  morals  of  the  com- 
munity are  endangered  by  the  long  continuance  of  such 
labor. 

The  reasons  for  this  demand  of  labor  for  shorter  hours 
are  threefold.  In  the  first  place,  in  normal  times  there  is 
no  longer  any  great  necessity  for  long  hours  of 

.         _      ,  .  .  ...  The  reasons. 

continuous  work.  In  former  days,  when  living 
was  precarious,  such  a  necessity  did  exist,  and  the  tradition 
that  life  could  not  be  maintained  without  hard  and  con- 
tinuous work  gradually  grew  up.  To-day,  rightly  or 
wrongly,  labor  is  struggling  to  break  down  this  tradition. 
Again,  with  a  legitimate  amount  of  spare  time,  it  is  possible 
for  men  to  do  greater  and  more  effective  work.     Shorter 


480  American  Economic  Life 

hours  mean  higher  efficiency.  Finally,  the  wide  use  of 
machinery  in  industry  has  not  only  made  the  output  of 
goods  greater,  but  has  also  caused  labor  to  become  more 
monotonous  and  nerve  racking.  As  a  relief  from  this 
monotony  and  strain,  labor  demands  more  time  for  im- 
proved health  and  social  betterment. 

While  higher  wages  and  shorter  hours  result  in  immediate 

advantages  to  labor,  it  is  also  important  that  the  general 

conditions  under  which  labor  works  should  be 

Improved 

working  improved.  For  this  reason,  the  union  makes 
every  attempt  to  better  the  working  conditions 
and  the  surroundings  of  labor.  Through  the  efforts  of  the 
union,  aided  by  philanthropists  and  social  workers,  legis- 
latures have  enacted  many  laws  against  child  labor,  sweat- 
shops, dangerous  working  conditions,  and  other  indus- 
trial abuses.  This  legislation  has  proved  of  benefit,  not 
only  to  labor,  but  to  the  whole  community.  While,  there- 
fore, the  main  object  of  unionism  has  been  to  improve  the 
working  conditions  of  members  of  its  own  group,  its  benefits 
have  frequently  been  enjoyed  by  labor  in  general. 

Weapons  of  Unionism.  —  What  instruments  does  the 
union  employ  to  carry  out  this  program  of  higher  wages, 
The  trade  shorter  hours,  and  better  working  conditions  ? 
agreement.  As  a  IU\e^  there  are  three  powerful  weapons  in 
the  hands  of  organized  labor  which  it  may  use  to  accomplish 
its  purpose :  (1)  the  trade  agreement,  (2)  the  strike,  and 
(3)  the  boycott.  The  trade  agreement,  as  the  name 
signifies,  is  simply  an  agreement  in  a  given  trade,  or  group 
of  allied  trades,  between  the  employer  and  the  workers. 
The  employer  on  his  side  makes  a  bargain  with  a  committee 
representing  the  workmen  on  their  side.  The  trade  agree- 
ment is  thus  a  "  collective  bargain,"  and  the  great  majority 


The  Program  of  Labor  481 

of  industries  in  which  unions  exist  are  conducted  under 
such  collective  bargaining.  Of  course,  the  success  and 
effectiveness  of  this  agreement  depend  largely  on  a  solid 
body  of  union  workers.  For  this  reason,  the  union  naturally 
desires  a  "  closed  shop,"  that  is,  an  establishment  in  which 
only  organized  labor  is  employed.  On  the  other  hand,  the 
employer  may  prefer  an  "  open  shop,"  in  order  that  he 
may  have  more  freedom  of  choice  in  the  employment  of 
labor. 

When  unavoidable  friction  occurs  between  the  employer 
and  the  workers  concerning  the  terms  of  a  trade  agreement, 
or  some  equally  important  matter,  the  union  The  strike: 
attempts  to  enforce  its  demand  by  means  of  the  Meaning. 
strike.  The  strike  is  an  organized  cessation  of  work 
initiated  by  the  employees  for  the  purpose  of  securing 
their  terms,  or  of  resisting  those  of  the  employer.  It  is  a 
revolutionary  measure  and  can  be  justified  only  by  some 
most  unusual  condition  of  affairs.  Because  of  its  deep 
and  widespread  consequences,  this  weapon  should  never 
be  employed  by  the  union  except  as  an  absolutely  final 
resort  to  secure  just  demands. 

The  effects  of  the  strike  are  threefold.  In  the  first  place 
it  affects  the  worker.  By  means  of  it,  he  may  be  able  to 
force  the  employer  to  grant  higher  wages,  or  Effect  on 
shorter  hours,  or  better  working  conditions.  On  labor- 
the  other  hand,  the  strike  may  prove  a  calamity  to  the 
average  worker.  Wages  stop  at  once,  and,  while  the  union 
men  may  be  supplied  with  strike  benefits,  these  are  often 
inadequate  to  meet  the  demands  of  family  life.  Then, 
again,  when  work  is  resumed,  oftentimes  the  leaders  of  a 
strike,  and  sometimes  the  strikers  themselves,  are  not 
reinstated  by  the  employer.     If  these  men  live  in  a  small 


482  American  Economic  Life 

town,  depending  upon  one  or  two  industries,  their  position 
becomes  quite  precarious.  Altogether,  the  strike  offers 
to  labor  a  very  uncertain  remedy. 

To  the  employer,  the  strike  involves  serious  consequences. 
Of  course,  it  is  true  that,  should  he  win  the  strike,  he  would 
Effect  on  secure  more  absolute  control  over  his  business 
employer.  an(j  ^e  a^je  to  decrease  wages,  lengthen  hours, 
and  impose  his  own  working  conditions.  On  the  other 
hand,  the  enforced  idleness  of  his  plant  entails  great  finan- 
cial loss.  In  addition  to  this,  much  property  may  be 
destroyed  by  violence.  Again,  if  he  loses  the  strike,  the 
extra  expense  entailed  by  such  losses  seriously  handicaps 
the  employer  in  resuming  his  business  operations.  For 
these  reasons,  the  employer  is  opposed  to  strikes. 

Finally,  strikes  seriously  affect  the  public ;  and,  because 
of  this  fact,  it  is  generally  agreed  that  the  public  should  be 
Eject  the  final  arbiter  of  disputes  between  labor  and 

on  public.  capital.  A  strike  curtails  production.  The 
public,  therefore,  will  have  less  to  consume  during  the 
ensuing  period.  Then,  too,  as  is  the  case  in  nearly  all 
great  conflicts  between  labor  and  capital,  a  strike  is  often 
followed  by  an  increase  in  prices  which  falls  heavily  upon 
the  public.  The  strike  also  seriously  menaces  social  wel- 
fare through  destruction  of  property  and  violation  of  law. 

In  addition  to  the  trade  agreement  and  the  strike,  the 
union  possesses  still  another  weapon  —  the  boycott.  This 
The  boy-  *s  simply  an  organized  refusal  on  the  part  of  a 
cott:  group  of  persons  to  buy  goods  from  another  per- 

Meamng.  gon^  or  gr0Up  0f  persons.  It  may  be  used  by 
opposing  business  houses,  but  it  is  chiefly  the  weapon  of 
the  worker  and  of  the  public.  It  has  several  distinct  forms, 
some  of  which  may  be  legally  employed ;   but  the  courts, 


The  Program  of  Labor  483 

through  injunctions,   have  sometimes  prevented  the  use 
of  the  boycott  in  its  worst  forms. 

In  the  simple  boycott,  a  group  of  persons,  who  have  been 
working  for  a  certain  employer,  peacefully  refuse  to  buy 
his  products.  In  the  compound  boycott,  the  Its  different 
workmen  directly  interested  in  injuring  the  boy-  f°rfns- 
cotted  company  refuse  to  deal  with  those  who  decline  to 
join  in  the  boycott.  This  form  of  boycott  has  been  regarded 
as  a  conspiracy  and  declared  illegal.  The  third  form  of 
boycott  is  negative  in  character  and  is  known  as  the  "  fair 
list,"  or  "  white  list."  In  the  first  case,  the  union  periodical 
publishes  a  list  of  firms  described  as  "  fair  "  because  they 
work  under  union  hours,  pay  union  wages,  and  employ 
union  men.  In  the  second  case,  the  Consumers'  League 
publishes  a  list  of  firms  described  as  "  white  "  because 
they  do  not  violate  factory  laws  or  other  rules  agreed  upon. 
The  fourth  form  of  boycott  is  the  "  unfair  list,"  or,  as  it 
has  been  called,  the  "  we  don't  patronize  "  list.  In  this 
case,  the  labor  periodical  actually  publishes  the  names  of 
firms  that  do  not  provide  fair  conditions  for  their  employees, 
and  thus  urges  the  public  not  to  purchase  their  goods.  The 
Supreme  Court  has,  in  certain  cases,  prohibited  the  use  of 
this  form  of  the  boycott.  It  may  be  said,  however,  that 
as  a  result  of  the  Clayton  Act  of  1914,  the  court  may  per- 
haps revise  its  former  decisions  on  this  subject. 

Armed  with  the  strike  and  the  boycott,  and  using  the 
collective  bargain  to  secure  its  end,  modern  unionism  has 
made  innumerable  attempts  to  raise  wages  and  outlook 
to  bring  about  better  working  conditions.     The  for.    . 

0  °  unionism : 

success  attending  both  these  efforts  has  been   The 
widespread.     However,  because  of  the  rise  in  benefits- 
prices,  the  advance  in  wages  has  often  been  more  apparent 


484  American  Economic  Life 

than  real.  On  the  other  hand,  an  actual  and  permanent 
gain,  in  the  form  of  shorter  hours  and  improved  working 
conditions,  has  resulted  from  union  activities.  Another 
beneficial  effect  of  labor  unions  is  found  in  their  educational 
activities.  The  debates  and  discussions  of  the  union 
stimulate  mental  activity,  and  offer  opportunities,  of 
social  culture  and  advancement.  Furthermore,  labor 
unions  often  help  the  worker  in  time  of  sickness  and  dis- 
tress, providing  relief  in  case  of  accident,  death,  or  unem- 
ployment. Finally,  the  greatest  benefit  of  modern  union- 
ism is  to  be  found  in  its  effect  upon  the  standard  of  living 
of  workingmen.  The  steady  advance  in  the  standard  of 
living  enjoyed  by  American  laborers  is  almost  altogether 
traceable  to  the  powerful  influence  of  unionism  in  securing 
a  higher  wage,  and  in  maintaining  that  wage  when  once 
secured. 

On  the  other  hand,  the  program  of  labor  is  not  without 
its  dangers.     The  union  is  frequently  charged  with  reduc- 
ing the  level  of  group  efficiency  to  that  of  its 

The  dangers.         &  .  ,  .  ' 

least  efficient  worker.  Furthermore,  there  is  no 
doubt  whatever  that  labor  unions  sometimes  limit  output 
and  thereby  curtail  production.  In  unusual  times,  like 
the  period  of  the  World  War,  this  decreased  production 
constitutes  a  serious  social  menace.  Under  such  circum- 
stances, partly  because  of  this  limited  output,  abnormally 
high  prices  prevail,  the  burden  of  which  falls  upon  the 
general  public.  Through  labor  unions,  class  antagonisms 
may  also  be  engendered,  and  the  solidarity  necessary  to 
true  national  greatness  may  be  jeopardized.  The  labor 
agitator  and  demagogue  may  do  untold  harm  to  society 
by  widening  the  breach  between  labor  and  capital.  Of 
this  character  is  the  agitation  of  such  labor  organizations 


The  Program  of  Labor  485 

as  the  Industrial  Workers  of  the  World,  which  openly 
preaches  class  war,  direct  action,  and  the  destruction  of 
private  property.  No  condemnation  can  be  too  severe  for 
this  kind  of  radical  labor  organization.  Labor  must  be 
amenable  to  the  laws  of  social  justice,  for  its  alliance  with 
radicalism  will  result  in  its  own  destruction.  The  cause 
of  true  unionism  suffers,  also,  when  labor  organizations  are 
unfair  in  their  demands,  and  threaten  to  accomplish  their 
ends  through  anti-social  action.  Whatever  may  be  the 
consequences  to  labor,  the  rights  of  the  public  must  be 
protected.  Labor,  no  more  than  capital,  may  be  allowed  to 
wield  unjust  monopoly  power. 

QUESTIONS   FOR  RECITATION 

1.  How  does  the  program  of  labor  differ  from  the  idea  of  profit 
sharing?     Which  is  the  more  democratic?     Why? 

2.  Describe  how  the  trade  union  developed  into  the  labor  union. 
Through  what  organization  was  this  accomplished?  Why  is  it  so 
successful  ? 

3.  What  industrial  changes  made  necessary  the  evolution  of  the 
trade  union  into  the  labor  union? 

4.  What  are  the  definite  demands  of  the  labor  union  ?  Are  they 
all  equally  important  ? 

5.  Why  can  industrial  workers  secure  higher  wages  through  the 
union  than  by  individual  action  ? 

6.  Is  the  eight-hour  demand  any  more  reasonable  now  than  it 
was  a  hundred  years  ago  ?    Why  ? 

7.  In  the  United  States,  what  legal  difficulties  are  sometimes 
encountered  in  the  attempt  to  regujate  hours  of  labor  ? 

8.  What  has  the  union  accomplished  in  the  way  of  improved 
working  conditions  ? 

9.  What  is  the  "  trade  agreement "  ?    How  is  it  arrived  at  ? 

10.  What  is  the  difference  between  the  "closed  shop"  and  the 
"open  shop "  ?     Which  do  you  advocate ?     Why  ? 

11.  Define  a  strike.     Discuss  its  threefold  effects. 


486  American  Economic  Life 

12.  Give  some  examples  of  great  strikes,  with  their  consequences. 

13.  What  is  a  boycott?  Give  an  example  with  which  you  are 
familiar. 

14.  Distinguish  between  the  simple  and  secondary  boycott. 

15.  What  is  the  difference  between  the  "fair  list"  and  the  "un- 
fair list "  ?     Which  has  been  declared  illegal  ? 

16.  How  may  the  Clayton  Anti-trust  Act  of  1914  affect  the 
activities  of  labor  unions  ? 

17.  Summarize  the  advantages  of  labor  unions.  Which  is  the 
greatest  ? 

18.  Do  you  support  everything  that  unionism  permits?  Why 
not? 

19.  Would  you  permit  labor  to  do  things  you  would  not  permit 
capital  to  do  ?     Explain. 

20.  Outline  the  chief  dangers  or  evils  that  may  accompany  un- 
bridled unionism. 

PROBLEMS  FOR  DISCUSSION 

1.  Discuss  the  value  of  collective  bargaining  to  the  labor  union. 

2.  How  much  justice  is  there  behind  the  collective  bargain? 

3.  Discuss  the  economic  basis  for  the  eight-hour  day. 

4.  Discuss  the  effect  of  an  eight-hour  day  on  the  quality  and 
quantity  of  the  output. 

5.  What  is  the  effect  of  pace  setting  on  the  product  ? 

6.  Why  do  men  strike  ?     Discuss  its  justifiability. 

7.  Is  the  "strike"  spirit  a  good  one  for  the  community?     Why 
not? 

8.  Can  the  "strike "  spirit  be  eliminated ?     How ? 

9.  Discuss  the  Danbury  Hatters'  Case. 

10.  Is  the  "boycott"  spirit  a  good  one?     Why  not? 

11.  If  you  were  a  wageworker,  would  you  feel  that  your  inter- 
ests and  those  of  your  employer  were  essentially  opposed?  State 
reasons. 

12.  Under  what  circumstances  might  unions  be  of  advantage  to 
employers  as  well  as  to  employees? 

13.  Should  union  activity  be  permitted  to  interfere  with  industry? 
Why  not  ? 


The  Program  of  Labor  487 

14.  What  would  be  the  significance  of  the  entrance  of  the  union 
into  politics? 

15.  Discuss  the  idea  of  compulsory  arbitration. 

16.  Should  railroad  employees  be  permitted  to  strike? 

17.  Has  the  public  any  rights  in  conflicts  between  labor  and 
capital  ? 

18.  What  is  a  "lockout"? 

19.  How  may  labor  participate  in  the  management  of  industry? 


SUPPLEMENTARY   READING 

Adams,  T.  S.  and  Sumner,  H.  L.    Labor  Problems. 

Ashley,  W.  J.     The  Adjustment  of  Wages. 

Cole,  G.  D.  H.     The  World  of  Labor. 

Commons,  J.  R.     Trade  Unionism  and  Labor  Problems. 

Laidler,  H.  W.     Boycotts  and  the  Labor  Struggle. 

Lowell,  J.  S.     Industrial  Arbitration  and  Conciliation. 

Mitchell,  J.     Organized  Labor. 

Pigou,  A.  C.     Principles  and  Methods  of  Industrial  Peace. 

Reeves,  W.  P.    State  Experiments  in  Australia  and  New  Zealand. 


CHAPTER  XLVII 

The  Program  of  Regulation 

I.   Development  of  regulation 
i.   The  individualistic  attitude 
2.   The  social  attitude  : 

a.  Necessity  for  regulation 

b.  The  modern  test 

c.  The  government's  duty 

II.   Regulation  through  police  power 
i.    Its  meaning 
2.   Its  application : 

a.  Hours  of  work : 

(i)  Of  women  and  children 
(2)  Of  adult  males 

b.  Sanitation : 

(1)  Of  factories 

(2)  Of  houses 

c.  Food  inspection 

III.   Regulation  of  prices 

1 .  Principle  of  "  cost  price  " : 

a.  Its  meaning 

b.  Its  requisite 

2.  Examples  of  regulation : 

a.  Control  of  labor 

b.  Revision  of  tariff  ■ 

c.  Control  of  trusts 

d.  Price  regulation 

3.  The  outlook 

Development  of  Regulation.  —  The  western  world  of 
the  latter  eighteenth  and  early  nineteenth  centuries  was 

488 


The  Program  of  Regulation  489 

dominated  by  the  idea  of  individual  freedom.  In  phi- 
losophy, legislation,  industry,  religion  —  everywhere  —  the 
spirit  of  democracy  had  taken  hold  upon  the  Theindivid. 
people.  This  democracy,  however,  was  essen-  uaiistic 
tially  different  from  democracy  as  it  is  thought  of 
at  the  present  time.  The  individual  then,  as  now,  was  the 
factor  of  primary  interest  in  social  progress.  Yet  indi- 
vidual welfare,  according  to  the  view  prevailing  at  that 
time,  was  to  be  secured  through  individual  freedom.  The 
policy  of  laissez  faire  —  "let  alone  "  —  was  rigorously 
enforced,  so  that  any  activity  of  the  individual  was  justi- 
fied, provided  it  did  not  interfere  too  seriously  with  the 
welfare  of  the  remaining  members  of  society. 

The  opening  years  of  the  twentieth  century  still  reveal 
the  presence  of  the  spirit  of  democracy,  but  in  an  essentially 
different  form.     The  eighteenth  and  nineteenth  The  social 
century  democracy  commanded  the  government  attltude: 

TV pcp  9  v^/'V 

to  leave  the  individual  practically  free  to  do  as  jor  regu. 
he  pleased.  But  more  than  a  hundred  years  of  lation- 
this  individual  freedom  have  shown,  to  the  satisfaction  of 
a  great  majority,  that  the  eighteenth  century  laissez-faire 
philosophy  often  resulted  in  much  evil.  Society  is  not 
always  justified  in  letting  the  individual  take  his  course; 
because,  if  an  individual  has  anti-social  ideas  and  is  left 
free  to  do  as  he  pleases,  society  must  suffer  from  his  un- 
restricted freedom.  The  industrial  monopolist  believes 
that  he  should  be  "  let  alone,"  but,  from  this  point  of  view, 
society  does  not  agree  with  him.  He  is  dependent  upon 
society  for  his  power,  and,  like  any  trustee,  must  give  an 
account  of  his  stewardship. 

Thus,  in  the  first  half  of  the  twentieth  century,  men 
are  measuring  proposed  actions  by  the  test  of  social  welfare. 


490  American  Economic  Life 

The  question  which  is  raised  is  not  merely  one  of  individual 
right,  but  of  social  justice.  Does  a  man  wish  to  conduct 
The  modern  ms  business  in  a  certain  way  ?  What  will  be  the 
test.  effect  of  his  act  upon  society  ?     If  it  be  harmful 

to  the  community,  society  is  coming  to  the  view  that  such 
action  should  be  forbidden,  or  limited  by  social  restraints. 
For  example,  when  woman  first  entered  industry,  the 
employer  imposed  long  hours  of  labor  and  improper  work- 
ing conditions  upon  her.  When  society  realized  that  the 
effect  of  such  action  was  detrimental  to  social  welfare,  it 
demanded  that  the  employer's  conduct  in  this  direction 
be  subject  to  restrictions  designed  for  the  good  of  the  com- 
munity. According  to  this  view,  social  welfare  becomes  the 
test  of  individual  action. 

Under  this  spirit  of  social  control  the  program  of  govern- 
ment regulation  has  developed  with  surprising  rapidity. 
The  govern-  Jefferson,  more  than  a  century  ago,  said,  "  That 
ment's  duly,  government  is  best  which  governs  least."  Now, 
however,  it  is  regarded  as  government's  duty  to  regulate 
the  limits  beyond  which  the  individual  may  not  pass  and 
remain  free  from  social  punishment.  Proceeding  on  this 
principle,  society  regulates  rates,  inspects  factories,  requires 
fire  escapes,  and,  in  various  other  directions,  controls  free- 
dom of  individual  action. 

Regulation  through  Police  Power.  —  The  first  attempts 
at  general  regulation  by  the  government  were  made  through 
its  "  police  power."  By  police  power  is  meant 
'  m  g*  the  authority  of  the  state  to  regulate  individual 
action  for  the  general  good.  Of  course,  government  must 
protect  its  citizens.  Men  must  not  be  wantonly  murdered ; 
property  must  not  be  unjustly  appropriated;  the  public 
peace  must  not  be  unnecessarily  disturbed.     The  activities 


The  Program  of  Regulation  491 

of  government  in  these  directions  are,  therefore,  a  natural 
part  of  the  sovereignty  of  the  state.  But  government  may 
also  exercise,  in  other  directions,  its  power  to  protect,  not 
only  the  safety,  but  also  the  health  and  morals  of  the 
community. 

In  pursuance  of  this  legal  doctrine,  we  have  seen  that 
the  work  of  women  and  children  has  been  so  regulated  that 
their    health    and    safety    are    conserved.     For   • 

f  Its  appli- 

example,  it  is  unlawful  to  employ  children  under  cation : 
a  certain  age  in  a  factory,  because  social  welfare  Hours 
demands  that  children  shall  have  a  minimum  of 
education  before  taking  up  the  tasks  of  life.  Women, 
too,  are  forbidden  to  work  more  than  a  certain  number 
of  hours  per  week ;  and  employers  are  compelled  to  provide 
specified  sanitary  conveniences,  because  the  courts  have 
ruled  that  the  health,  safety,  and  morals  of  society  depend 
upon  these  regulations.  For  example,  Congress  has 
enacted  a  law  limiting  the  hours  of  labor  for  women  working 
in  factories,  hotels,  and  shops  in  the  District  of  Columbia 
to  eight  hours  a  day ;  the  legislature  of  Ohio  has  passed  a 
law,  which  has  been  upheld  by  the  Supreme  Court  of  the 
United  States,  limiting  the  hours  of  labor  for  women  em- 
ployed in  certain  industries  to  ten  hours  a  day ;  and  the 
state  of  Oregon  has  enacted  a  statute,  likewise  declared 
constitutional,  providing  for  an  Industrial  Welfare  Com- 
mission to  fix  hours  of  labor,  minimum  wages,  ar»d  condi- 
tions of  labor  for  working  women. 

In  America,  legislation  concerning  working  conditions 
has  confined  itself,  until  recently,  to  the  passage  of  such 
laws  regulating  the  labor  of  children,  the  hours  and  working 
conditions  for  women,  and  the  safety  of  workers.  Under 
the  American  system  of  government,  the  adult  male  worker 


492  American  Economic  Life 

has  sometimes  been  denied  legislative  protection  on  the 
ground  that  he  is  free  to  contract  as  he  pleases.  After  a 
laborer  once  chooses  to  work  in  a  dangerous  or  unhealthful 
trade,  the  court  has  frequently  held  that  he  takes  upon 
himself  the  responsibility  for  any  danger  that  may  attach 
to  the  trade.  Again,  the  court  has  declared  that  a  man's 
labor  is  his  own,  and  that  it  would  be  an  infringement  upon 
his  personal  liberty  to  limit  his  hours  of  work.  Further- 
more, the  advocate  of  freedom  of  contract  has  relied  upon 
the  constitutional  restriction  that  no  person  shall  be  de- 
prived of  life,  liberty,  or  property  without  due  process  of 
law.  For  all  these  reasons,  it  has  been  extremely  difficult 
to  secure  legislation  limiting  the  hours  of  labor  for  work- 
ingmen.  Nevertheless,  some  progress  has  been  made  in 
this  direction.  For  example,  the  Supreme  Court  has 
declared  constitutional  a  Utah  law  prohibiting  miners  from 
working  more  than  eight  hours  a  day,  although  it  has 
declared  unconstitutional  a  New  York  law  prohibiting 
bakers  from  working  more  than  ten  hours  a  day.  A  great 
advance,  however,  was  made  in  191 7,  when  the  Supreme 
Court  of  the  United  States  declared  constitutional  Oregon's 
law  fixing  a  ten-hour  day  for  workingmen  in  manufacturing 
establishments.  Other  states  have  also  passed  laws  limit- 
ing hours  of  labor  in  such  manufacturing  concerns  as  smelt- 
ing plants,  plaster  and  cement  mills,  plate  glass  works, 
rolling  mills,  irrigation  works,  sawmills,  cotton  and  woolen 
mills,  and  similar  establishments.  Among  the  measures 
taken  to  protect  adult  male  workers  should  also  be  men- 
tioned the  various  State  Workmen's  Compensation  Acts, 
as  well  as  the  Federal  Employers'  Liability  Act  of  1908. 

In  recent  years,  the  police  power  has  been  widely  exer- 
cised in  the  regulation  of  sanitation.     It  is  but  a  generation 


The  Program  of  Regulation  493 

since  houses  and  factories  were  constructed  in  any  way 
that  would  suit  the  convenience  or  whim  of  the  builder. 
Recent  scientific  investigations,  which  have  made 

Sanitation. 

known  the  effects  of  bad  air  and  lack  of  necessary 
sanitary  conveniences  upon  workers  in  factories,  have  led 
to  factory  legislation  aimed  directly  at  the  evil  of  insanita- 
tion.  While  these  measures  have  not  in  all  cases  been  en- 
forced, they  exist  on  the  statute  books  as  an  indication 
of  legislative  opinion  on  the  subject  of  public  health. 

Attempts  have  likewise  been  made  to  improve  the  sani- 
tation of  houses.  Formerly  it  was  generally  believed  that 
a  man's  house  was  his  castle ;  that  men  had  a  right  to  pri- 
vacy and  freedom  at  home ;  and  that  the  conditions  there 
surrounding  their  lives  were  a  matter  of  indifference  to 
the  public  at  large.  The  reverse  of  this  attitude  is  seen  in 
the  modern  treatment  of  disease.  In  a  densely  settled 
neighborhood  it  is  a  matter  of  much  more  than  individual 
concern  that  a  man  has  smallpox.  Therefore,  particularly 
in  newer  cities,  many  efforts  in  the  form  of  city  planning 
have  been  made  to  improve  living  conditions.  The  size, 
air  space,  sanitation,  and  construction  of  houses  are  becoming 
subject  to  strict  regulation  because  of  their  effect  upon  in- 
dividual and  social  welfare. 

Another  field  in  which  regulation  has  become  especially 
necessary  is  in  connection  with  food  adulteration.  Society 
is  often  menaced  by  the  evils  of  adulteration  and  falsification 
of  goods,  which  sometimes  threaten  the  very  p00d 
life  and  health  of  the  community.  The  United  inspection. 
States  has  been  slow  to  abandon  the  doctrine  of  laissez 
faire  —  or  non-interference  —  in  the  domain  of  food  and 
ware  inspection.  However,  a  beginning  has  been  made  in 
this  direction  through  the  passage  of  the  Federal  Pure  Food 


494  American  Economic  Life 

and  Drugs  Act,  which  aims  to  check  effectively  the  adul- 
teration of  food  and  drink.  Before  the  passage  of  this  act, 
food  adulteration  was  widespread;  but,  with  its  passage, 
a  gradual  change  is  being  effected  in  the  attitude  of  the 
manufacturer  regarding  his  duty  to  the  public. 

Regulation  of  Prices.  —  Another  form  of  government 
regulation  is  the  attempt,  championed  by  Professor  Clark 
"  Cost  °f  Columbia  University,  to  secure  "  cost  price." 

price  ":  a  "  cost  price  "  js  a  price  equivalent  to  the  cost 
its  meaning.  Qj  proc]uction  plus  a  reasonable  gain  to  the 
producer.  Therefore,  according  to  this  view,  in  the  fixing 
of  cost  price  no  element  of  monopoly  power  or  special 
privilege  should  enter.  Cost  prices,  Professor  Clark  main- 
tains, are  just  prices.  Accordingly,  social  justice  demands 
that  the  consumer  be  given  the  benefit  of  modern  discovery 
and  inventions,  so  that,  when  a  device  is  perfected  which 
lowers  the  cost  of  production,  the  price  of  the  commodity 
in  question  may  be  proportionately  reduced. 

Cost  prices  depend,  therefore,  upon  free   competition. 

We  have  seen  that,  as  a  matter  of  fact,  prices  are  to-day 

often    determined    by  monopoly  power.     Con- 

Its  requisite.  ,  . 

sequently,  these  two  forces  —  competition  and 
monopoly  —  come  into  conflict.  Both  cannot  exist  at 
the  same  time.  If  competition  is  to  be  restored  and  cost 
prices  established,  monopoly  power  must  be  regulated. 
That  is  to  say,  whenever  monopoly  power  attempts  to  fix 
prices,  the  government  must  interfere  in  an  attempt  to 
reestablish  conditions  of  competition.  The  regulation  of 
monopoly  power  becomes  a  requisite  to  the  principle  of 
cost  price. 

Proceeding  on  this  basis,  the  advocates  of  this  doctrine 
desire  to  regulate  all  forms  of  monopoly  so  that  cost  prices 


The  Program  of  Regulation  495 

may   be   assured.      If,    for   example,    labor,    through   its 
monopoly  power  of  organization,  fixes  too  high  a  price  for 
its  services,  it  must  be  subjected  to  government 
regulation.     No  exception  is  to  be  made  in  its  regulation: 
favor.     When   the  union  uses  its  weapons  so   Control  of 
effectively   that  it   develops   into    a  monopoly 
organization,  it  destroys  that  free  competition  upon  which 
the  adherents  of  this  school  believe  the  price  of  labor  should 
depend.     The  program  of  regulation,   therefore,  includes 
labor  within  its  sphere  of  activity.      It  may  readily   be 
seen  that  this  program  is  directly  opposed  to  the  teachings 
of  those  who  advocate  the  development  of  unrestrained 
monopoly  power  on  the  part  of  labor. 

In  the  same  way,  the  manufacturer  must  not  be  allowed 
to  profit  by  special  privilege.  Whenever  an  unfair  advan- 
tage has  been  given  him  by  reason  of  undue  pro-  Revision  of 
tection  against  foreign  competition,  the  govern-  tari^- 
ment  must  revise  its  former  act.  There  is  little  doubt  that 
prices  have  been  artificially  raised  by  means  of  special 
privilege  accorded  the  manufacturer  through  protective 
legislation.  These  prices  are  certainly  not  cost  prices. 
Therefore,  to  restore  the  latter,  the  government  must  re- 
vise tariff  acts  and  regulate  the  business  of  the  manufac- 
turer. 

This  principle  of  government  regulation  has,  however, 
as  we  have  already  seen,  been  chiefly  applied  to  the  control 
of  great  combinations  of  capital  in  the  form  of  control  of 
trusts  and  railroads.  Enough  has  been  said  lrusts- 
in  previous  chapters  to  indicate  the  character  of  these  laws, 
and  their  desired  effects.  It  is  only  necessary  at  this  point 
to  call  attention  to  the  fact  that  they  are  the  most  repre- 
sentative American  attempt  to  apply  the  program  of  govern- 


496  American  Economic  Life 

ment  regulation  to  the  affairs  of  society.  Whether  this 
program  is  completely  practicable  will,  in  large  measure, 
be  determined  by  the  ultimate  effect  of  railroad  and  trust 
legislation.  Thus  far,  both  groups  of  legislation  are  in  a 
formative  stage,  and  the  future  is  still  in  doubt. 

Since  the  American  entrepreneur,  through  the  non- 
interference doctrine  of  the  early  nineteenth  century, 
price  naturally  developed  into  a  monopolist,  it  has 

regulation,  become  increasingly  necessary  for  the  community 
to  exercise  some  effective  restraint  upon  the  exercise  of  his 
monopoly  power.  How  is  this  to  be  accomplished  ?  During 
the  period  of  the  World  War,  Americans  received  their 
first  extensive  training  in  general  price  regulation.  Com- 
missions were  appointed  (with  power  to  regulate  the  prices 
of  wheat,  sugar,  and  coal)  which  developed  an  administra- 
tive machinery  previously  unknown  to  the  American  people. 
It  may  be  that,  with  the  experience  thus  acquired,  America 
may  in  this  spirit  approach  the  problem  of  the  control  of 
monopoly  power.  Already,  the  existence  of  the  Interstate 
Commerce  Commission,  the  Federal  Trade  Commission, 
and  the  various  Public  Service  Commissions  of  the  Common- 
wealths, furnishes  a  nucleus  for  the  development  of  such 
price-fixing  commissions.  It  must  be  remembered,  how- 
ever, that  such  a  policy  is  fraught  with  danger  when  ad- 
ministered in  opposition  to  natural  economic  laws. 

In  conclusion,  we  may  say  that  the  program  of  govern- 
ment regulation  is  likely  to  succeed  (1)  if  the  police  power 
of  the  state  is  developed  into  an  effective  instru- 

The  outlook.  .  *   *,  1  /  \  -r 

ment  for  the  protection  of  the  worker,  (2)  if  com- 
petition is  restored,  or  monopoly  power  is  effectively  checked, 
and  (3)  if  adequate  instrumentalities  are  developed  for 
representing  and  conserving  social  welfare.     Through   a 


The  Program  of  Regulation  497 

progressive  interpretation  of  protective  legislation  by  the 
judicial  organs  of  government,  the  first  requisite  may  be 
accomplished.  While  it  is  doubtful  whether  American 
society  will  ever  return  to  a  pure  regime  of  free  competition, 
it  is  not  impossible  for  the  benefits  of  monopoly,  through 
public  control  and  regulation,  to  be  enjoyed  by  the  com- 
munity. Finally,  the  present  development  of  industrial 
bodies  and  welfare  commissions  seems  to  indicate  a  grow- 
ing desire  on  the  part  of  the  public  to  solve  industrial  prob- 
lems in  accordance  with  the  principle  of  social  welfare. 

QUESTIONS   FOR  RECITATION 

1.  Explain  the  policy  of  laissez  faire.     Is  it  still  advocated? 

2.  Why  has  regulation  of  industry  become  necessary?     Give 
examples. 

3.  How  should  we  measure  individual  actions  to-day ?    Why? 

4.  Define  the  police  power.     Give  examples  of  its  exercise. 

5.  Why  is  it  easier  to  regulate  the  working  conditions  of  women 
and  children  than  those  of  men  ? 

6.  What  laws  have  actually  been  passed  for  the  protection  of 
women  and  children  in  industry  ? 

7.  What  are  the  chief  legal  obstacles  in  the  way  of  regulating 
the  labor  of  men  ? 

8.  What  laws  have  actually  been  passed  for  limiting  the  hours 
of  labor  of  workingmen  ? 

9.  Explain  the  work  accomplished,  through  government  regula- 
tion, in  the  matter  of  sanitation. 

10.  What  is  the  government  —  both  state  and  national  —  doing 
to  secure  pure  food  and  honest  goods  ? 

11.  What  is  "cost  price"?    How  may  it  be  secured? 

12.  What  must  be  regulated  to  insure  cost  prices ?    Why? 

13.  Who  would  naturally  oppose  the  idea  of  cost  prices?     Why? 

14.  Apply  the  program  of  government  regulation  to  labor. 

15.  What  do  the  Sherman  and  Clayton  Anti-trust  Acts  attempt 
to  do? 


498  American  Economic  Life 

1 6.  How  could  prices  be  regulated  by  the  government?  Do  you 
approve  of  this  policy  ? 

PROBLEMS   FOR  DISCUSSION 

i.   Discuss  the  advantages  and  disadvantages  of  individualism. 

2.  Is  there  any  rule  for  determining  the  limits  of   state  inter- 
ference with  individual  liberty  ? 

3.  In  what  way  does  the  exercise  of  police  power  justify  govern- 
ment regulation  of  industry  ? 

4.  Explain  carefully  under  what  circumstances  a  legal  eight- 
hour  day  might  be  justified  under  the  police  power. 

5.  Is  a  cost  price  necessarily  a  just  price?     Defend  your  posi- 
tion. 

6.  What  is  the  attitude  of  the  government  regulationist  toward 
a  tariff  on  wool  ?     On  antiques  ? 

7.  What  control  would  the  government  regulationists  exercise 
over  capitalistic  combinations  ?     Why  ? 

8.  Would  an  advocate  of  this  program  have  the  state  fix  rents? 
Why  not  ? 

9.  Discuss  the  effect  of  this  program  on  the  monopoly  profits 
of  entrepreneurs. 

10.  Discuss  the  dangers  of  price-fixing. 

11.  Contrast  Jefferson's  idea  of  government  with  the  twentieth- 
century  idea. 

12.  What  is  the  attitude  of  the  governmental  regulationist  toward 
monopoly?     Toward  competition? 

13.  What  distinction  has  the  Supreme  Court  made  between  the 
regulation  of  interstate  commerce  and  internal  manufacturing? 

14.  What  is  the  Federal  Employers'  Liability  Act?  Why  are 
Liability  Acts  being  superseded  by  Workmen's  Compensation 
Acts? 

15.  Describe  some  of  the  more  important  activities  of  the  Federal 
government  during  the  World  War  period.  Did  these  constitute  a 
fair  demonstration  of  the  program  of  regulation? 

16.  Discuss  the  possibilities  of  the  program  of  government  regu- 
lation.   Is  it  likely  to  succeed? 


The  Program  of  Regulation  499 


SUPPLEMENTARY   READING 

Andrews,  I.     Minimum  Wage  Legislation. 

Clark,  J.  B.  and  J.  M.     The  Control  of  Trusts. 

Commons,  J.  R.,  and  Andrews,  J.  B.  Principles  of  Labor  Legisla- 
tion. 

Ely,  R.  T.     Monopolies  and  Trusts. 

Federal  Trade  Commission.    Annual  and  Special  Reports. 

Frankfurter,  F.,  and  Goldmark,  J.  The  Case  for  the  Shorter  Work 
Day  (2  vols.). 

Hutchins,  B.  L.,  and  Harrison,  A.  A  History  of  Factory  Legisla- 
tion. 

Jenks,  J.  W.    Governmental  Action  for  Social  Welfare. 

Ross,  E.  A.    Sin  and  Society. 

Seager,  H.  R.    Social  Insurance. 

Van  Hise,  C.  R.     Concentration  and  Control. 


CHAPTER  XL VIII 

Programs  of  Nationalization 

I.   The  Single  Tax 
i.   Its  object 

2.  Its  meaning 

3.  Its  alleged  advantages  : 

a.  Prevents  land  speculation 

b.  Simplifies  taxation 

c.  Increases  production 

d.  Relieves  poverty 

4.  Its  attempted  justification  : 

a.  Land  different  from  other  property 

b.  Land  values  largely  social  values 

5.  Its  limitations 

6.  Its  outlook 

II.    Socialism 

1.  Its  distinctive  character 

2.  Its  recent  growth 

3 .  Its  chief  criticisms  of  society  : 

a.  Exploitation  of  labor 

b.  Growth  of  private  monopoly 

c.  Waste  of  effort 

d.  Evils  of  competition 

e.  Lack  of  justice 

4.  Its  leading  principles  : 

a.  Government  ownership  advocated 

b.  Private  property  opposed 

5.  Its  evils 

6.  Its  future 

7.  Other  radical  doctrines 

500 


Programs  of  Nationalization  501 

Two  other  programs  of  economic  reform  depend  for  their 
success  upon  the  action  and  support  of  government.  Both 
of  these  may  be  described  as  programs  of  nationalization. 
In  the  one,  the  aid  of  government  is  invoked  in  order  that 
society  as  a  whole,  rather  than  particular  individuals,  may 
enjoy  the  benefits  of  the  increased  valuation  of  land  re- 
sulting from  social  action.  In  the  other,  government  is 
relied  upon  to  bring  about  not  only  the  nationalization 
of  land,  —  natural  resources,  —  but  also  of  capital,  — 
the  tools  of  production.  The  one  is  known  as  the  Single 
Tax  Theory  ;  the  other,  as  Socialism. 

The  Single  Tax.  —  In  his  "  Progress  and  Poverty," 
Henry  George  asks  this  question,  "  Why,  in  spite  of  the 
increase  in  productive  power,  do  wages  tend  to  a  minimum 
which  will  give  but  a  bare  living?  "  Starting  out  with  this 
query,  George  explains  the  coexistence  of  prog- 
ress and  poverty  on  the  ground  that  the  land- 
lord class  has  appropriated,  as  rent,  a  great  mass  of  wealth 
that  should  go  to  labor  as  wages,  or  to  society  as  social 
income.  He  shows  that  the  great  increase  in  land  values 
due  to  the  growth  of  population  (as  evidenced  by  the  fact 
that  Manhattan  Island  alone  in  three  hundred  years  in- 
creased in  value  one  hundred  million  times)  has  gone,  not 
to  the  people  who  created  it,  but  has  been  appropriated, 
through  the  absorption  of  economic  rent,  by  a  few  landlords 
in  the  form  of  an  "  unearned  increment."  Therefore,  to 
restore  this  "  unearned  increment  "  to  society,  and  thus 
to  do  away  with  the  poverty  of  the  masses,  Henry  George 
proposed  that  economic  rent  be  confiscated  by  means  of  a 
single  tax  on  the  value  of  land.  This  plan  is  now  univer- 
sally known  as  the  Single  Tax  Theory. 

The  Single  Tax,  to  use  Henry  George's  own  words,  is 


502  American  Economic  Life 

"  one  single  tax  levied  on  the  value  of  land  irrespective  of 
the  value  of  improvements,  in  or  on  it."  All  machinery 
its  of  taxation  would  be  done  away  with,  except 

meaning.  tjlat  neCessary  to  assess  and  tax  land  values. 
Hence  the  name  "  Single  Tax."  Now  it  must  be  distinctly 
borne  in  mind  that  this  Single  Tax  means  a  tax  on  land  it- 
self, —  not  on  any  of  its  buildings  or  improvements.  The 
tax  is  aimed  solely  at  land  values,  and  is  thus  an  attempt 
to  socialize  the  value  of  the  land  by  turning  over  to  the 
people  its  economic  rent  which  has  been  termed  an  "  un- 
earned increment." 

The  advantages  claimed  for  the  Single  Tax  are,  first,  that 
while  such  a  tax  would  be  so  high  as  to  cove  the  full  value 
.  of  the  bare  land,  it  would  not  apply  at  all  to  the 

advantages:  value  of  improvements  upon  land.  Since  these 
Prevents ■        improvements    would    remain    untaxed,    there 

speculation.  .  .  .  , 

would  be  every  inducement  to  make  them.  At 
the  same  time,  since  land  itself  would  be  taxed  to  its  full 
value,  it  is  argued  that  there  would  be  no  inducement  for 
land  speculation.  Nothing  whatever  would  be  gained  by 
holding  idle  land.  In  this  manner,  while  every  encourage- 
ment would  be  offered  land  improvement,  an  effective  blow 
would  be  given  to  land  speculation.  Our  present  system 
of  taxation  is  said  to  encourage  land  speculation  by  tax- 
ing unimproved  land  at  a  lower  rate  than  improved  land. 

Another  advantage  claimed  for  the  Single  Tax  is  its 
simplifying  effect  upon  the  mechanism  of  taxation.  The 
Simplifies  present  land  tax  would  be  retained,  but  the  in- 
taxahon.  tricate  system  of  internal  revenue,  tariff  collec- 
tion, and  income  taxation  would  be  abolished,  and  a  great 
saving  in  the  collection  of  taxes  effected.  The  basis  of 
taxation  would  be  completely  shifted  from  the  value  of 


Programs  of  Nationalization  503 

buildings,  tools,  machinery,  and  all  processes  and  products 
of  industry  to  the  rental  value  of  lots  and  lands.  Further- 
more, there  would  be  no  chance  to  escape  land  taxation. 
Personal  property  may  be  concealed.  Land,  however, 
cannot  be  hidden  from  the  assessor. 

In  the  third  place,  it  is  claimed  that  the  Single  Tax  would 
increase  the  productive  capacity  of  the  community.     Henry 
George  believed  that,  of  the  three  factors  of  increases 
production,  land  was  monopolized  chiefly.     The  Production. 
Single  Tax  attempts  to  undermine  this  monopoly  of  land 

(1)  by  removing  all  taxes  from  labor  and  its  products,  and 

(2)  by  concentrating  all  taxation  in  a  single  tax  on  the  value 
of  land.  It  is  therefore  predicted  that  this  substitution 
would  take  away  any  inducement  for  holding  idle  land.  No 
one  would  desire  "  to  corner  "  land  for  a  "  rise  "  in  future 
value.  Hence  the  land  would  be  released  for  purposes  of 
production.  This  substitution  of  the  tax  on  land  for  taxes 
on  industry  would,  it  is  claimed,  free  the  active  elements  of 
production  —  labor  and  capital.  At  the  same  time,  this 
substitution  would  bring  into  use  more  land  than  is  now 
available  for  productive  purposes. 

Finally,  advocates  of  the  Single  Tax  assert  that  it  will 
relieve  poverty  by  taking  the  "  unearned  increment  "  from 
the  landlord  and  restoring  it  to  society.  In  Relieves 
other  words,  wages  will  be  increased  through  P°verty- 
appropriation  of  rent.  Hence  the  income  of  the  masses 
will  be  enlarged  at  the  expense  of  that  of  the  landlords. 
Henry  George  firmly  believed  that  the  private  appropria- 
tion of  land  values  resulted  in  poverty,  disease,  and  crime. 
He  was  absolutely  convinced  that  exclusive  taxation  of 
land  values  would  be  followed  by  increased  general  pros- 
perity and  social  welfare.     Then,  too,  since  the  Single  Tax 


504  American  Economic  Life 

would  fall  most  heavily  on  the  cities  where  land  values  are 
greatest,  the  poorer  agricultural  districts  would  enjoy  more 
general  prosperity  by  being  relieved  of  the  burden  of  ex- 
cessive taxation. 

The  advocates  of  the  Single  Tax  argue,  moreover,  that 
it  is  just,  because  they  do  not  regard  land  like  ordinary 
itsjusti-  private  property.  As  the  earth  was  not  made 
fication:  ^y  man^  kut  mereiy  supplies  a  temporary  dwell- 
entfrom  mg  place  for  generations  of  mankind,  the  men 
property.  born  into  the  world  have  an  equal  right  to  the 
free  gifts  of  nature.  Therefore,  they  assert,  the  natural  re- 
sources of  a  nation  should  be  used  for  the  benefit  of  the 
entire  nation ;  and  this  condition  of  affairs  can  only  be 
brought  about  by  shifting  the  burden  of  taxation  from 
the  majority,  who  do  not  hold  land,  to  the  minority  who 
do.  Single  Taxers  believe  that  a  tax  laid  on  tools  or  any 
other  creation  of  human  labor  violates  a  right  of  property, 
because  it  takes  from  the  man  who  has  created  it  part  of 
the  thing  which  he  has  made.  They  maintain  that  the 
tax  on  land  values,  however,  takes  from  individuals  nothing 
that  they  have  actually  created. 

Again,  assert  the  Single  Taxers,  the  value  of  land  is  not 
due  to  the  work  of  man  and,  therefore,  its  value  bears  no 
Land  values  relation  to  actual  individual  effort.  For  ex- 
sodai  ample,  the  value  which  is  created  in  the  land  as 

the  result  of  the  centralization  of  business  in 
New  York  City  is  appropriated  by  a  few  individual  land- 
owners. This,  maintain  the  Single  Taxers,  is  unfair  be- 
cause they  did  not  create  the  value  of  Manhattan  Island, 
nor  are  they  alone  responsible  for  increasing  it.  This 
socially  created  value,  they  assert,  should  be  used  for  the 
purpose  of  developing  certain  community  interests.     With 


Programs  of  Nationalization  505 

these  properly  secured  and  safeguarded,  poverty  would 
be  at  a  minimum  by  reason  of  a  more  equal  distribution  of 
social  income. 

It  is  highly  improbable  that  the  Single  Tax  would  ac- 
complish all  that  its  advocates  claim.  While  the  sincerity 
of  their  belief  is  undeniable,  and  the  inspirational 
work  of. their  leader  compelling,  the  fact  remains  tJjJioM.~ 
that  poverty  is  not  due  alone  to  the  private  appro- 
priation of  rent  from  land.  As  a  matter  of  fact,  although 
rent  has  risen  in  the  United  States  for  the  last  century, 
wages  have  also  risen  because  the  sum  total  of  social  income 
has  increased.  The  causes  of  poverty  are  so  multitudinous 
that  no  one  remedy  can  be  found  for  its  cure.  While  the 
Single  Tax  might  somewhat  relieve  poverty,  it  certainly 
would  not  abolish  it,  or  result  in  the  establishment  of  com- 
plete and  universal  democracy.  Assuredly,  no  thinking 
person  can  believe  that  the  Single  Tax  would  prove  a  pana- 
cea for  all  social  ills.  Furthermore,  the  justice  of  compelling 
one  factor  of  production  to  bear  all  the  burden  of  taxation 
is  open  to  question.  In  a  true  democracy,  capital  and  also 
labor  should  bear  a  fair,  but  proportionate,  share  of  this 
burden. 

Whether  the  amount  derived  from  land  taxation  alone 
would  be  sufficient  to  meet  all  the  expenses  of  government 
is  also  a  matter  of  legitimate  dispute.     However,  ,    • 

.  6  F  'Its  outlook. 

the  present  system  of  taxation  is  unquestionably 
imperfect.  Therefore,  the  principle  of  the  Single  Tax 
would  doubtless  offer  a  solution  for  some  of  the  chief  evils 
of  the  present  fiscal  system.  This  principle  has  already 
been  applied  in  New  Zealand,  Vancouver,  and,  in  a  some- 
what modified  form,  in  England  and  parts  of  Germany.  As 
a  program  it  has  never  been  afforded  a  really  extensive 


506  American  Economic  Life 

opportunity  to  demonstrate  its  effectiveness.  However, 
present  indications  point  to  a  time  in  the  near  future  when 
some  of  our  American  States,  as  well  as  several  of  the  more 
progressive  European  countries,  will  be  seriously  remodeling 
their  taxing  systems  on  the  basis  of  the  Single  Tax  Theory. 
But  the  tremendous  financial  burdens  imposed  upon  civili- 
zation by  the  World  War  may  make  it  necessary  to  expand 
the  Single  Tax  into  a  "  Triple  Tax  "  on  land,  income,  and 
inheritance. 

Socialism.  —  While  the  Single  Taxers  hold  to  the  social- 
ization of  natural  resources  as  a  means  of  securing  social 
its  distinc-    Progress>  another  school  of  reformers  —  the  So- 

tive  charac-  cialists  —  hold  that,  in  order  to  attain  social  jus- 
tor 

tice,  not  only  natural  resources  but  also  capital 

must  be  nationalized.  While  production  would  thus  be- 
come socialized  through  the  collective  ownership  of  the  tools 
of  production,  distribution  would  also  become  more  or  less 
nationalized  through  the  appropriation  of  interest  and 
profits,  as  well  as  rent,  and  through  the  consequent  en- 
largement of  labor's  share  of  the  social  income.  Thus  the 
Socialist  asserts  the  right  of  labor  to  the  full  product  of 
industry. 

The  recent  growth  of  Socialism  is  one  of  the  important 
phenomena  of  modern  times.  In  several  European  coun- 
its  recent  tries  its  growth  has  been  so  rapid  that  many  be- 
growth.  \\evt  it  will  eventually  become  a  firmly  estab- 
lished institution.  Rapid  progress  in  this  direction  has 
already  been  made  in  Germany,  Italy,  Austria,  France,  and 
Belgium.  In  191 2,  the  socialist  vote  in  Germany  numbered 
over  4,250,000;  while  in  France,  in  1914,  it  approximated 
1,400,000.  The  social  unrest  following  the  World  War 
served  still  further  to  increase   not   only    the  number  of 


Programs  of  Nationalization  507 

Socialists,  but  also  the  number  of  still  more  revolutionary 
Radicals.  In  the  United  States,  although  Socialism  has 
attracted  to  its  ranks  several  hundreds  of  thousands  of 
voters,  the  movement  has  not  made  such  rapid  strides  as 
in  European  countries.  The  more  stable  and  favorable 
economic  condition  of  the  masses  has  caused  this  movement 
to  manifest  itself  chiefly  in  the  extremes  of  American  society. 
The  kind  of  Socialism  here  advocated  is  largely  a  mixture 
of  "  Utopian  "  ideas  with    "  Marxian  "  theories. 

The  objections  which    Socialism  makes  to  the  present 
order   of  society   seem    to   group    themselves   under   five 
headings.     First,  there  is  the  belief  in  the  uni-  its 
versality   of   exploitation.     Exploitation   means  cnticisms: 
that  an  individual  receives  less  than  he  produces.  ti*n  °0}  a~ 
According  to  the  Socialist's  use  of  the  term,  a  day  labor- 
laborer,  creating  in  a  year  so  many  hundreds  of  dollars' 
worth  of  value  and  receiving  only  half  of  this  in  wages,  is 
being  exploited  by  the  capitalist  to  the  amount  of  value 
retained.     In  the  eyes  of  the  Socialist,  exploitation  is  an 
inevitable  result  of  a  system  which  permits  the  private 
ownership  of  the  tools  of  production  and  the  control  of 
capital  in  such  a  manner  that  the  owner  of  the  machine 
becomes  the  master.     He  argues  that  it  is  to  the  interest 
of  the  tool  owner  to  get  the  tool  user  to  work  at  the  lowest 
possible  wage;  hence  exploitation  eventually  results. 

The  second  criticism  which  the  Socialist  urges  against 
the  present  system  is  that  it  permits  the  growth  of  private 
monopolies  and  offers  no  effective  way  to  check 
them.     Many  fabulous  fortunes,  he  asserts,  have  private 
been  made  through  the  monopoly  control  of  ar-  monopoy- 
tides   of    consumption,  —  coal,    meat,    ice,    and   iron ;  or 
through  the  ownership  of  monopoly  business,  —  street-car 


508  American  Economic  Life 

lines,  telephone,  railroad,  gas,  and  water  supply  companies. 
The  Socialist  believes  that  it  is  hopeless,  and  furthermore 
undesirable,  to  endeavor  to  restore  competition  as  a  regu- 
lator of  prices.  As  competition  gives  way  to  combination,  so 
he  believes  state  monopoly  must  succeed  private  monopoly. 

The  third  criticism  which  the  Socialist  urges  against 
modern  society  is  its  wastefulness.  Competition  is  un- 
Waste  of  economic ;  cooperation,  economic.  Under  the 
effort.  competitive  system  much  is  done  in  duplicate, 

and  triplicate,  that  could  just  as  well,  under  a  system  of 
cooperation,  be  done  but  once.  This,  he  asserts,  is  par- 
ticularly true  in  the  distribution  of  goods  for  consumption. 
A  half  dozen  competing  hucksters,  milkmen,  and  icemen 
pass  over  the  same  route  daily,  when  half  that  number 
might  have  distributed  the  same  amount  of  goods  had 
there  been  no  competition. 

Hence,  another  criticism  of  the  Socialist  is  against  the 
essentially  evil  nature  of  competition.  In  industrial  com- 
Eviis  of  petition  he  sees  a  force  that  calls  out  all  the  bad 
competition.  m  numan  nature,  while  at  the  same  time  it  sup- 
presses much  that  is  good.  He  charges,  that,  to  undersell 
their  competitors  and  make  a  profit,  men  adulterate  food, 
employ  child  labor,  violate  factory  inspection  laws,  and  pay 
low  wages.  Competition,  he  persistently  maintains,  puts 
the  law-abiding  and  humane  employer  at  a  disadvantage 
and  forces  the  indifferent  employer  over  into  the  camp  of 
those  who  seek  success  at  any  price. 

Finally,  the  Socialist  criticizes  the  present  industrial 
order  on  the  ground  that  it  does  not  meet  the  demands 
Lack  of  of  social  justice.  He  sees  in  the  present  system 
justice.  no  or(jeriy  pian  for  constructive  development, 

or  for  distributive  justice.     On  the  side  of  production,  he 


Programs  of  Nationalization  509 

points  out  the  phenomenon  of  poverty,  the  lack  of  employ- 
ment, and  the  absence  of  equal  opportunity.     He  regards 
labor  as  the  sole  creator  of  wealth,  but  sees  land  and  capital, 
the  passive  factors  of  production,  receiving  a  large  part  of 
the  total  product  of  industry.     Hence,  from  the  standpoint 
of  distribution,  he  argues  that  distributive  justice  can  be 
secured  only  when  the  right  of  labor  to  the  full  product  is 
universally  recognized.  Just  how  this  product  is  to  be  divided 
among  the  workers,  the  Socialists,  however,  are  not  in  com- 
plete agreement.  Some  maintain  that  it  should  be  distributed 
according  to  the  principle  of  equality ;  others,  according  to 
actual  needs;  and  still  others,  according  to  individual  services. 
To  remedy  these  evils  that  are  attributed  to  the  present 
order  of  things,  Socialism  comes  forward  with  an  entirely 
different  plan  that  strikes  at  the  very  founda-  its  leading 
tions  of  our  present  social  system.     It  proposes  to  PnnciPles : 
substitute  for  -the  private  ownership  of  all  land  ownership 
and  capital  goods,  —  factories,  railroads,  stores,  advocated- 
and   the   like,  —  national   ownership    and   operation.     In 
this  plan  the  Socialist  sees  many  advantages.     Under  such 
a  system  there  would  be  no  capitalist  to  demand  interest ; 
all  the  returns  of  labor  would  go  to  labor ;  and  exploitation 
would  cease.     As  the  government  would  own  all  the  land 
and  natural  resources,   there   would  be   no  monopolist's 
profits  to  be  paid  out  of  the  pockets  of  the  consumers. 
Since  competition  would  be  destroyed,  the  Socialist  pic- 
tures an  ideal  world  in  which  there  would  be  no  further 
incentive  to  adulteration  of  goods,  to  child  labor,  or  to  the 
violation  of  health  and  fire  ordinances.     Every  child  would 
be  guaranteed  education  and  support  at  state  expense,  and 
every  man  in  old  age,  after  his  life  work  is  over,  would  be 
a  pensioner  of  the  government. 


510  American  Economic  Life 

The  Socialist  believes  that  in  many  ways  society  has 
outgrown  the  institution  of  private  property,  just  as  much 
Private  as  **  ^s  outgrown  the  institution  of  property 

property  in  individuals.  He  admits  that  both  may  have 
been  valuable  at  certain  stages  in  the  develop- 
ment of  civilization,  but  asserts  that  that  time  is  now 
passed.  He  attacks  the  institution  of  private  property, 
therefore,  and  advocates  the  abolition  of  the  private  owner- 
ship of  land  and  the  tools  of  production.  In  common  with 
the  Single  Taxer,  the  Socialist  believes  that  the  land  is  a 
free  gift  of  nature,  and  he  would,  therefore,  socialize  it. 
He  goes  a  step  farther  than  the  Single  Taxer,  however,  when 
he  advocates  the  abolition  of  private  property  in  capital 
goods,  —  factories,  railroads,  and  all  direct  agencies  of  pro- 
duction. Capital  is  to  be  nationalized  in  order  that  the 
capitalist  may  be  eliminated  as  a  claimant  in  distribution. 
The  Socialist  wars  incessantly  against  the  capitalist,  whose 
place  is  taken  in  the  socialistic  regime  by  the  government. 
However,  Socialism  permits  private  ownership  in  consump- 
tion goods ;  that  is,  it  leaves  to  individuals  the  ownership 
of  such  articles  of  consumption  as  food,  housing,  and  cloth- 
ing, and  sanctions  private  property  in  incomes  allotted  to 
individuals  by  state  authority. 

The  predictions  of  the  Socialist  are  so  positive  and  his 
optimism  so  pronounced  that  one  might  be  led  to  believe 
that  his  plan  for  social  betterment  would  surely 
inaugurate  the  millennium.  It  is  here,  however, 
that  the  Socialist  makes  his  greatest  error  of  judgment. 
His  optimism  for  the  future  is  only  equaled  by  his  pessimism 
for  the  present.  He  forgets  that,  under  Socialism,  since 
industries  would  necessarily  be  organized  on  a  great  national 
scale,  the  efficiency  arising  from  individual  initiative  and 


Programs  of  Nationalization  511 

responsibility  would  be  lacking.  The  productive  machinery 
of  society  would  be  less  efficient ;  there  would  be  less  oppor- 
tunity for  the  genius  to  make  his  mark  in  industry ;  govern- 
ment itself  might  break  down  under  the  weight  of  its  indus- 
trial responsibilities.  Men  and  women  would  still  be  dis- 
honest, lazy,  wasteful,  and  shiftless  under  Socialism. 
Officials  would  still  be  corrupt ;  ambitious  men  would  usurp 
power ;  demagogues  would  secure  office ;  the  difficulty  of 
allotting  different  kinds  of  labor  to  different  individuals 
would  cause  envy  and  dissatisfaction ;  the  tyranny  of  the 
majority  would  be  a  menace  to  free  speech  and  personal 
liberty.  Finally,  if  incomes  were  distributed  according 
to  the  principle  of  equality,  invention  and  enterprise  would 
be  stifled. 

To  the  impartial  student,  therefore,  Socialism  does  not 
hold  out  the  salvation  of  mankind.  On  the  contrary,  a 
critical  analysis  of  Socialism  justifies  the  con- 

1      .  .  ,  n    *  f  Its  ^se- 

clusion that  the  so-called  cooperative  common- 
wealth might  prove  more  unjust  and  unsatisfactory  than 
the  present  social  order.  Its  contribution  to  American 
economic  life  seems  to  lie  in  its  attitude  toward  private  mo- 
nopoly. Even  here,  however,  its  program  is  faulty.  Only 
in  the  field  of  natural  monopolies  would  the  principle  of 
public  ownership  —  should  public  control  fail  —  prove 
desirable.  It  is  true  that  competition  gives  way  to  com- 
bination where  natural  monopolies  are  concerned.  Un- 
regulated private  monopoly  in  such  industries  is,  therefore, 
a  menace  to  social  welfare.  Hence,  government  regulation, 
and  perhaps  eventually  public  ownership,  may  offer  the 
most  effective  solution  of  this  most  vexatious  problem. 
It  would  only  be  in  this  field,  however,  that  the  socialistic 
principle    would    become    applicable.     Thus    agriculture, 


512  American  Economic  Life 

manufacturing,  and  commerce  would  still  be  largely  open  to 
private  enterprise.  In  America,  therefore,  the  socialistic 
doctrine  seems  to  offer  its  greatest  field  for  exploitation 
in  the  direction  of  the  public  control  of  natural  monopo- 
lies. Thus,  only  indirectly  will  Socialism  accomplish  its 
true  purpose.  It  will  serve  to  liberalize  our  economic 
thinking. 

In  closing  this  discussion  of  Socialism  it  may  be  well  to 
distinguish  it  from  various  other  radical  doctrines  that 
Q  h  are  often  thoughtlessly  associated  with  the  idea  of 

radical  Socialism.     In  popular  thought,  Socialism  and 

Communism  are  frequently  confused.  In  fact, 
beginning  with  the  last  half  of  the  nineteenth  century, 
these  terms  have  gradually  interchanged  meanings.  To- 
day Communism  signifies  the  abolition  of  private  property 
not  only  in  production  goods,  as  does  Socialism,  but  also 
in  consumption  goods,  the  private  ownership  of  which 
Socialism  permits.  Collectivism  is  a  term  that  is  often  used 
synonymously  with  Socialism.  On  the  other  hand,  Anarchy 
is  sometimes  ignorantly  associated  with  Socialism.  As  a 
matter  of  fact,  these  two  systems  are  diametrically  opposed. 
While  Socialism  advocates  the  widest  possible  extension  of 
governmental  authority,  Anarchism  preaches  the  abolition 
of  all  government,  substituting  in  its  place  free  voluntary 
associations.  Again,  Socialism  should  be  sharply  distin- 
guished from  Syndicalism.  In  America,  this  movement  is 
represented  by  the  Industrial  Workers  of  the  World,  who 
advocate  the  control  of  industry  by  the  workingmen  or- 
ganized in  trade  unions  or  syndicates.  After  these  syndi- 
cates have  secured  control  of  industry,  they  would  then 
attempt  to  secure  control  of  the  government.  This 
movement    advocates    such    revolutionary    doctrines    as 


Programs  of  Nationalization  513 

sabotage,  the  general  strike,  and  the  "  war  of  the  classes." 
It  is  therefore  absolutely  inimicable  to  social  welfare. 

QUESTIONS  FOR  RECITATION 

1.  State  briefly  the  difference  between  the  Single  Tax  and  So- 
cialism. 

2.  What  do  we  mean  by  nationalization  as  applied  to  land  ?    How 
may  it  be  accomplished? 

3.  What  is  the  Single  Tax  ?    What  is  its  main  purpose  ? 

4.  What  is  the  meaning  of  "unearned  increment"?    How  does 
it  arise? 

5.  Why  does  the  Single  Tax  exempt  improvements  on  land  from 
taxation  ? 

6.  Show  how  the  Single  Tax  would  prevent  land  speculation; 
show  how  it  would  simplify  taxation. 

7.  Why  would  the   Single  Tax  increase  production?    Relieve 
poverty  ? 

8.  How  does  the  Single  Taxer  justify  his  doctrine? 

9.  Do  you  think  the  Single  Tax  may  be  so  justified? 

10.  What  are  the  limitations  of  the  Single  Tax  theory? 

1 1 .  Discuss  the  outlook  for  the  Single  Tax. 

12.  What  is  Socialism?    What  does  it  emphasize  on  the  side  of 
production  ?    On  the  side  of  distribution  ? 

13.  Outline  the  arguments  in  favor  of  Socialism ;  against  Socialism. 

14.  Contrast  Socialism  and  Anarchism. 

15.  In  what  European  countries  has  Socialism  made  most  prog- 
ress ?    Why  ? 

16.  What  is  meant  by  "exploitation  of  labor"?    What  is  the 
attitude  of  Socialism  toward  this  doctrine  ? 

17.  What  is  the  attitude  of  Socialism  toward  private  monopoly? 
Toward  free  competition? 

18.  What    would    Socialism   substitute   for   private    monopoly? 
Why? 

19.  Would  there  be  any  private  property  under  Socialism?    To 
what  extent  ? 

20.  Explain  the  evils  of  Socialism.     What  might  be  the  fate  of  a 
socialistic  society  ? 


514  American  Economic  Life 

21.  What  do  you  think  of  the  future  of  Socialism  in  the  Uni tec- 
States  ? 

22.  What  does  the  Socialist  mean  by  "distributive  justice "  ?  How 
would  he  secure  it  ? 

PROBLEMS  FOR  DISCUSSION 

1.  Describe  the  life  of  Henry  George. 

2.  What  is  "the  full  economic  value  of  land"  which  Henry 
George  would  absorb  by  a  tax  ? 

3.  Outline  the  arguments  for  and  against  the  Single  Tax. 

4.  What  has  the  Single  Tax  accomplished  as  applied  in  New 
Zealand  ? 

5.  Is  there  any  connection  between  the  Single  Tax  Theory  and 
the  "natural  right"  doctrine? 

6.  Explain  just  exactly  how  the  Single  Tax  scheme  would  be 
administered. 

7.  Was  Marx  correct  in  assuming  that  labor  is  the  sole  cause  of 
value  ? 

8.  Discuss  the  different  kinds  of  Socialism. 

9.  Why  has  State  Socialism  had  such  a  rapid  rise  in  Germany? 

10.  What  are  the  leading  economic  doctrines  in  the  platform  of 
the  American  Socialist  party  ? 

11.  To  what  group  in  the  community  do  the  doctrines  of  Social- 
ism make  their  strongest  appeal  ?     Their  weakest  appeal  ? 

12.  Theoretically,  which  group  in  the  community  would  be  the 
chief  gainer  through  Socialism  ?     Why  ? 

13.  Is  Socialism  to  be  judged  by  its  ideal,  or  by  its  probable  work- 
ing ?     Why  ? 

14.  What  are  the  difficulties  which  you  think  the  cooperative 
commonwealth  would  experience  ? 

15.  Do  you  think  it  possible  for  a  government  representing  the 
workers  to  take  over  one  great  industry  after  another,  and  to  operate 
these  great  industries  for  the  common  welfare  ? 

16.  Does  the  Socialist  urge  equal  distribution  of  wealth? 

17.  What  are  the  forces  making  for  Socialism  in  the  United 
States  to-day  ?     What  are  the  forces  militating  against  Socialism  ? 

18.  Why  is  it  not  right  to  say  of  every  public  interference  in  in- 


Programs  of  Nationalization  515 

dustry   that  it  is  socialistic?    When  may  a  measure  be  called  so- 
cialistic ? 

19.  Is  the  idea  of  equal  opportunity  characteristic  of  Socialism 
only? 

20.  Explain  the  meaning  of  Syndicalism.     Where  has  it  devel- 
oped? 

21.  Show  the  evils  of  this  revolutionary  doctrine. 

22.  Why  is  it  absolutely  unsuited  to  American  conditions? 

SUPPLEMENTARY  READING 

Ely,  R.  T.    Socialism  and  Social  Reform. 

George,  H.    Progress  and  Poverty. 

Hillquit,  M.    History  of  Socialism  in  the  United  States. 

Kirkup,  T.     History  of  Socialism. 

Rae,  J.     Contemporary  Socialism. 

Seager,  H.  R.     Introduction  to  Economics,  pp.  517-525. 

Seligman,  E.  R.  A.    Essays  in  Taxation,  pp.  64-94. 

Spargo,  J.     Syndicalism,  Industrial  Unionism,  and  Socialism. 

Spencer,  H.     Man  vs.  the  State. 

Zenker,  E.  V.     Anarchism. 


CHAPTER  XLIX 

Economic  Reform  and  Social  Progress 

I.   Justification  of  progress 
i .   What  is  progress  ? 
2 .   Its  philosophical  basis : 

a.  Influence  of  environment : 
(i)  The  two  forces 

(2)  The  old  fatalism 

(3)  The  new  optimism 

b.  Belief  in  natural  capacity : 

(1)  The  opposite  view 

(2)  The  present  attitude 

II.   Requisites  of  progress 

1 .  The  ideals  : 

a.  Opportunity 

b.  Social  adjustment 

c.  Efficiency  in  education 

d.  Leisure 

e.  Recreation 
/.   Health 

2.  The  method 

At  first  glance  the  various  experiments  and  programs 
for  individual  and  social  betterment  seem  to  have  little 
in  common.  From  the  benevolent  attempts  of  the  em- 
ployer to  improve  the  condition  of  the  worker  to  the  in- 
sistent demands  of  the  Socialist  for  the  national  ownership 
of  the  tools  of  production,  there  are  many  varieties  of 
proposals.  But,  while  these  programs  of  economic  reform 
show  much  diversity  of  thought  and  opinion,  they  never- 

516 


Economic  Reform  and  Social  Progress        517 

theless  have  a  common  basis.  All  rest  upon  the  belief 
that  the  economic  and  social  conditions  of  American  life 
demand  improvement,  —  all  are  programs  of  social  prog- 
ress. 

Justification  of  Progress.  —  After  all,  then,  these  diverse 
plans  of  economic  reform  have  a  unity  of  purpose,  —  a 
desire  to  better  the  condition  of  the  worker,  what  is 
Their  advocates,  who  believe  absolutely  in  the  Pr°gress? 
attainment  of  progress,  are  sharply  distinguished  from  those 
reactionaries  who  believe  that,  "  Whatever  is,  is  right.' ' 
These  progressive  thinkers  are  not  content  with  "  well 
enough  "  ;  they  are  always  striving  for  "  something  better." 
Progress  is  the  goal  of  all  their  activities.  But  what  is 
social  progress  ?  It  is  the  forward  movement  of  all  members 
of  society,  —  not  the  mere  advance  of  particular  individuals. 
From  an  economic  standpoint,  progress  is  measured  by 
individual  and  social  welfare,  and  the  test  of  this  welfare 
is  individual  and  social  prosperity.  Thus,  progress  is  not 
only  the  goal  of  economic  endeavor,  but  it  is  also  the  goal 
of  economic  reform. 

What  reason  have  men  for  believing  that  social  progress 
is  possible?  To  answer  this  question,  one  must  understand 
the  character  of  the  forces  at  work  in  shaping  itsijaSiS: 
the  destinies  of  life.  Broadly  speaking,  these  influence  of 
forces  are  those  of  heredity  and  environment.  ennronment. 
Every  one's  life  is  a  product  of  these  two  forces.  Man  is 
thus  a  combination  of  inherited  traits  and  acquired  char- 
acteristics. But  which  of  these  two  sets  of  forces  is  the 
dominating  element  in  the  life  of  man?  One's  attitude  on 
this  question  determines  one's  philosophy  of  life.  The 
advocate  of  progress  bases  his  belief  on  the  dominating 
influence  of  social  environment. 


518  American  Economic  Life 

The  effect  of  the  opposite  view  —  that  man's  course  is 
chiefly  determined  by  physical  and  mental  heredity  —  is  at 
once  apparent.  If  this  be  true,  progress  in  many  cases  is 
impossible  of  attainment.  According  to  this  belief,  men 
may  be  born  vicious,  and  their  offspring  destined  by  the 
laws  of  heredity  to  remain  so  from  generation  to  generation. 
This  represents  the  old  fatalistic  attitude  towards  life.  So 
long  as  men  believed  that  the  evils  of  the  past  were  trans- 
mitted to  the  present,  social  progress  was  practically  im- 
possible. There  was  no  possibility  of  going  into  the  past 
and  influencing  the  parents  of  the  present  generation. 
This  present  generation,  depraved  because  of  the  depravity 
of  its  ancestors,  must  in  its  turn  hand  on  its  low  standards 
to  the  generations  of  the  future.  Thus  the  process  would 
be  endlessly  continued  through  years  of  hopeless  despond- 
ency. This  old  belief  in  hereditary  depravity  kept  society 
from  properly  educating  the  child,  prevented  normal  care 
of  the  criminal  and  social  outcast,  and,  in  every  direction, 
restricted  individual  and  social  betterment. 

The  new  view,  however,  is  full  of  hope  and  promise. 
The  modern  social  thinker  has  shaken  himself  free  from  the 
old  fatalistic  belief  in  the  inheritance  of  acquired  char- 
acteristics ;  and  announces  fearlessly  that,  since  he  believes 
that  only  inborn  traits  are  usually  inherited,  the  vast 
majority  of  social  evils  which  beset  mankind  are  not  the 
product  of  heredity,  but  are  generated  largely  by  the 
social  environment.  This  view,  by  emphasizing  the  fact 
that  most  men  are  normal,  makes  progress  possible.  It 
forms  the  basis  of  a  new  optimism  and  is  characteristic  of 
the  attitude  of  the  modern  social  worker.  According  to 
this  belief,  social  and  economic  conditions  may  be  improved 
largely   by  improving   man's   environment.     The   funda- 


Economic  Reform  and  Social  Progress         519 

mental  evil  lies  not  in  the  individual,  but  in  conditions 
surrounding  him.  If  bad  living  and  working  conditions 
are  responsible  for  misery  and  vice,  the  surroundings  of  the 
worker  must  be  improved.  Instead  of  the  past,  the  present 
must  be  investigated.  Each  generation  starts  afresh,  and, 
by  improving  its  surroundings,  rises  to  a  higher  level  of 
social  welfare  than  that  reached  by  its  predecessor.  Thus 
social  progress  is  attained  through  economic  betterment. 

The  other  side  of  this  conviction,  that  improvement  in 
environing  conditions  will  alleviate  misery  and  vice,  is  ex- 
pressed, of  course,  in  the  belief  in  man's  natural  BVf. 
capacity.  These  convictions  are  complemen-  natural 
tary.  Man  himself  is  believed  to  be  thoroughly  capact  y' 
capable  of  improvement,  and  this  belief  furnishes  a  real 
basis  for  progress.  This  concept  of  natural  capacity 
dominates  the  thought  of  a  progressive  society.  If  people 
were  born  with  a  fatalistic  curse  upon  their  heads,  if 
total  depravity  were  an  inherited  thing  —  the  product  of 
the  degeneracy  of  past  ages  —  progress  would  hardly  be 
possible.  During  the  centuries  when  such  ideas  were 
held,  but  little  progress  in  the  condition  of  the  masses  was 
made,  because  each  person  felt  the  impossibility  of  a  for- 
ward social  movement.  Recent  years,  however,  have 
seen  a  distinct  change  in  this  respect.  Thinkers  now 
vigorously  maintain  the  possibility  of  improvement ;  they 
have  turned  from  the  argument  of  "  total  depravity  "  to 
hat  of  "  natural  capacity." 

Requisites  of  Progress.  —  If,  then,  man  is  capable  of 
improvement  and  progressive  development,  what  is  required 
to  call  this  forth?  In  the  first  place,  he  must  The  ideals: 
be  given  opportunity.  This  was  emphasized  at  Opportunity. 
the  outset  of  our  study,  and  it  is  now  restated  in  its  closing 


520  American  Economic  Life 

pages.  Equal  opportunity,  however,  means  neither  equal- 
ity nor  identity.  An  embryo  tic  painter  and  an  embryo  tic 
engineer  are  neither  equal  nor  identical,  yet  each  may  be 
afforded  an  equal  chance  to  develop  his  particular  talent. 
Thus,  equal  opportunity  means  simply  an  equal  chance  to 
advance  and  is  advocated,  regardless  of  any  particular 
program  of  reform,  by  all  believers  in  progress.  If,  to- 
day, nine-tenths  of  the  men  and  women  about  us  are  born 
approximately  normal  and  naturally  capable,  they  will 
all  be  competent  to  progress  when  given  equal  opportunities. 

But  something  more  than  opportunity  is  essential  to 
social  progress.  Society  needs  adjustment.  In  order  to 
Social  ad-  secure  this  universality  of  opportunity  which  will 
justment.  permit  of  individual  development,  changes  must 
be  made  in  environing  conditions.  Families  are  underfed 
and  badly  housed;  children  are  sent  into  the  mills  at 
fourteen ;  the  school  system  is  not  planned  primarily  for 
the  worker ;  men  die  at  an  early  age  because  of  industrial 
accidents  and  preventable  diseases.  These  maladjust- 
ments which  are  responsible  for  lack  of  opportunity  must 
be  swept  aside.  No  conscious  will  has  placed  obstacles  in 
the  way  of  man's  development ;  and,  through  adjustment, 
society  itself  must  remove  them  wherever  they  exist. 

Of  equal  importance  with  opportunity  and  adjustment 
is  efficiency.  When  society  provides  the  first  two  elements 
Efficiency  in  efficiency  will  normally  follow.  In  all  directions 
education.  ^  CIy  0f  efficiency  is  heard.  If  progress  is  to 
be  attained,  society  as  well  as  individuals  must  develop  the 
capacity  to  produce  maximum  results  with  minimum  out- 
lays. In  the  factory,  in  the  home,  in  the  school,  in  the 
nation  —  everywhere  —  efficiency  is  equally  essential.  All 
programs  of  genuine  progress  emphasize  this  as  one  of  the 


Economic  Reform  and  Social  Progress         521 

foundation  stones  of  progress.  Efficiency,  of  course,  is  at- 
tained through  some  form  of  industrial  education.  Thus, 
the  economic  importance  of  education  becomes  at  once 
apparent.  Efficiency,  as  we  have  previously  seen,  also 
involves  conservation. 

With  the  attainment  of  opportunity,  adjustment,  and 
efficiency,  come  other  ideals  of  progress.  Chief  among 
these  are  leisure,  recreation,  and  health.     With- 

.    .  .  mix         Leisure. 

out  free  activity,  progress  is  not  possible.  In- 
dividuals must  have  spare  time  in  which  to  do  those  things 
that  it  is  impossible  to  accomplish  in  the  rush  of  industrial 
life.  The  great  achievements  of  the  world  are  often  the 
products  of  leisure  time.  When  men  and  women  are  edu- 
cated to  a  wise  use  of  free  time,  a  shorter  working  day  will 
prove  of  inestimable  advantage  to  true  progress. 

Along  with  the  requisite  of  leisure  comes  the  chance  for 
recreation.  To  be  progressive  —  to  be  able  to  move 
forward  in  the  affairs  of  life  —  man  must  have 

t  1  •  •  rm  •     •       Recreation. 

some  relief  from  the  strain  of  industry.  This  is 
afforded  through  proper  facilities  for  recreation.  Thus, 
realizing  that  recreation  is  an  ideal  of  true  progress,  mu- 
nicipalities every  year  appropriate  large  sums  of  money  for 
playgrounds,  parks,  and  recreation  piers ;  while  in  many 
directions  attempts  are  being  made  to  regulate  theatrical 
performances  and  motion  picture  exhibitions.  At  the 
same  time,  society  is  directing  its  efforts  toward  providing 
some  legitimate  form  of  recreation  for  rural  districts. 

Another  ideal  absolutely  essential  to  progress  is  that  of 
health.  It  is,  in  some  respects,  the  most  vital  of  them  all. 
Without  a  strong,  robust  body,  life  is  often  un- 

1     •     1*      .r  .  .,  T  Health. 

desirable  11  not  impossible.     In  every  program 

of  social  progress,  therefore,  full  provision  should  be  made 


522  American  Economic  Life 

to  develop  and  maintain  sound  health.  The  social  worker, 
to-day,  realizes  the  necessity  for  this  ideal  more  than  any 
other  reformer.  In  early  times,  men  often  believed  that 
disease  came  as  a  punishment  for  wrongdoing  and  was  an 
evidence  of  divine  wrath.  This  was  a  remnant  of  the  old 
fatalistic  attitude  toward  life.  To-day,  men  have  scientifi- 
cally demonstrated  that,  not  offended  deities,  but  germs 
and  bacteria  are  the  cause  of  sickness  and  disease.  Malaria 
is  not  carried  through  the  air  in  the  form  of  a  vapor,  but  is 
transmitted  through  the  sting  of  a  mosquito.  Remedy  for 
malaria,  therefore,  takes  the  form,  not  of  sacrificial  offer- 
ings, but  of  a  generous  application  of  crude  oil  to  the 
marshes  and  ponds  in  which  the  mosquito  breeds.  Thus, 
science  puts  to  rout  the  old  fatalism,  and  helps  in  the  cause 
of  social  progress. 

Concerning  these  ideals  of  progress  all  reformers  are  in 
practical  accord.  All  would  move  in  the  same  direction, 
The  with  the  same  general  end  in  view.     It  is  not 

method.  fiie  end  —  the  goal  of  progress  —  upon  which 
social  reformers  differ ;  it  is  the  means  —  the  method  of 
attaining  their  ultimate  desire.  But  even  here  there  is 
some  agreement,  —  some  measure  of  unison.  This  mani- 
fests itself  chiefly  in  one  direction.  It  is  generally  admitted 
that  social  progress  should  be  attained,  not  through  rapid 
revolution,  but  through  gradual  evolution.  Sudden  dis- 
turbances seldom  effect  permanent  changes.  Through  the 
slow  process  of  time,  extending  over  many  generations 
and  even  centuries,  progress  is  attained.  To  be  sure, 
revolutions  do  occur ;  and,  when  they  take  place,  thought 
and  discussion  are  provoked.  Nevertheless,  no  one  can 
reasonably  maintain  that  an  economic  or  social  revolution 
will  immediately  and  permanently  change  habits  of  thought 


Economic  Reform  and  Social  Progress         523 

crystallized  for  centuries  in  national  character.  The  in- 
coming of  the  factory  system  and  the  enunciation  of  Dar- 
win's concept  of  evolution  are  good  illustrations  of  revolu- 
tionary changes  in  economic  belief  and  social  thought.  Yet, 
in  both  these  cases,  the  corresponding  change  in  popular 
opinion  required  years  of  education  for  its  completion. 
So,  inevitably,  it  must  be  with  any  fundamental  reform 
instituted  in  behalf  of  social  progress.  Revolution  is  un- 
certain ;   evolution  is  unfailing. 

QUESTIONS  FOR  RECITATION 

1.  What  is  the  relation  between  economic  reform  and  social 
progress  ? 

2.  Define  progress.    What  is  meant  by  the  term  "  reactionaries  "  ? 

3.  What  reasons  have  men  for  believing  that  social  progress  is 
possible  ?     Did  Malthus  believe  in  progress  ?     Explain. 

4.  Explain  the  two  forces  at  work  in  the  life  of  every  individual. 

5.  How  does  the  biological  belief  in  the  non-inheritance  of 
acquired  characteristics  affect  one's  belief  in  progress  ? 

6.  What  is  fatalism?  What  lies  at  the  basis  of  this  belief? 
How  does  it  handicap  social  progress  ? 

7.  Give  some  illustrations  of  belief  in  fatalism  at  work  in 
human  history. 

8.  Distinguish  between  physical  and  social  environment.  Which 
is  the  advocate  of  progress  most  interested  in  ?    Why  ? 

9.  If,  biologically,  acquired  characteristics  are  not  usually  in- 
herited, how  can  social  conditions  improve  from  generation  to  genera- 
tion? 

10.  What  is  the  doctrine  of  total  depravity?    What  are  its  con- 
sequences ? 

11.  How  is  the  idea  of  natural  capacity  linked  with  tne  theory  of 
the  dominating  influence  of  social  environment  ? 

12.  Name  the  requisites  of  progress.     If  compelled  to,   which 
would  you  eliminate  ? 

13.  Show  the  relation  between  opportunity  and  social  adjust- 
ment. 


524  American  Economic  Life 

14.  Give  some  illustrations  of  needed  social  adjustments. 

1 5.  Explain  how  efficiency  may  be  attained.  How  it  may  be  over- 
emphasized? 

16.  Show  the  relation  between  leisure  and  recreation.  Why  are 
they  included  in  the  requisites  of  progress  ? 

17.  Give  definite  examples  of  how  society  may  improve  the 
health  and  life  of  the  community.  How  may  the  individual  help 
in  this  direction  ? 

18.  What  similarity  exists  in  all  sane  programs  of  economic  re- 
form? 

19.  Why  is  revolution  unsatisfactory,  if  not  harmful,  in  dealing 
with  economic  and  social  abuses  ? 

PROBLEMS  FOR  DISCUSSION 

1 .  Discuss  your  idea  of  progress. 

2.  What  part  does  the  social  environment  play  in  progress? 
Give  examples. 

3.  Why  are  modern  thinkers  optimistic? 

4.  What  is  meant  by  the  expression  "environment  is  plastic"? 

5.  What  basis  does  the  belief  in  natural  capacity  furnish  for 
optimism  ? 

6.  What  part  will  opportunity  play  in  progress?     Give  illus- 
trations. 

7.  What  measures  are  being  taken   to-day   to   prevent   infant 
mortality?    Premature  employment?    Why? 

8.  What  steps  are  being  taken  to  accomplish  a  better  distribu- 
tion of  population  in  this  country?    Why? 

9.  What  are  some  of  the  leading  lines  of  activity  in  social  work 
now  being  undertaken  in  America? 

10.  Which  is  more. important,  approximate  equality  of  posses- 
sions, or  approximate  equality  of  opportunity?  Do  we  have  to 
destroy  the  present  order  of  things  to  secure  the  latter  ? 

11.  With  a  more  general  diffusion  of  knowledge,  culture,  and 
publicity,  is  political  democracy  in  more  or  less  danger  ?  Is  equality 
of  opportunity  more  or  less  likely  to  ensue  ? 

12.  Discuss  "eclecticism"  in  social  and  economic  reform. 

13.  What  is  meant  by  "meliorism"? 


Economic  Reform  and  Social  Progress         525 

14.  Explain  why  the  evolutionary  method  is  necessary  in  bring- 
ing about  social  changes. 

15.  Why  is  revolution  ever  resorted  to? 

16.  How  are  economic  reforms  brought  about  in  the  United 
States  ?     Give  examples. 

SUPPLEMENTARY  READING 

Chapin,  F.  S.    Social  Evolution,  Chaps.  I-VI. 
Conklin,  E.  G.    Heredity  and  Environment. 
Conn,  H.  W.    Method  of  Evolution. 
Devine,  E.  T.    Social  Forces. 
Patten,  S.  N.    New  Basis  of  Civilization. 
Patten,  S.  N.    Product  and  Climax. 
Schmucker,  S.  C.    Meaning  of  Evolution. 


INDEX 


Accidents : 

causes,  149. 

effects,  152. 

kinds,  149  et  seq. 

number,  151. 

remedy,  155. 
Adjustment: 

meaning,  13,  14,  15- 

requisite  of  progress,  520. 
Agencies : 

land  transportation,  273  et  seq. 

water  transportation,  113  et  seq.,  280. 
Agriculture : 

development,  210. 

early  methods,  212. 

importance,  213. 

kinds,  213  et  seq. 

training,  216. 
American  foreign  trade : 

exports,  375. 

imports,  376. 
Americanization,  136,  142,  305. 
Animal  life,  228. 
Anti-trust  Act,  259. 
Apportionment  of  taxes,  see  Taxation. 

B 

Banking : 

cooperation  in,  470. 

operations  of,  191,  351. 
Barter,  337. 

Bills  of  exchange,  see  Credit. 
Bonds,  363. 

Book  credit,  see  Credit. 
Boycott : 

forms,  483. 

meaning,  482. 
Burden  of  taxation,  see  Taxation. 
Business  organization : 

early  forms,  254  et  seq. 

later  forms,  257  et  seq. 
By-products,  247. 


Capital  : 

and  surplus  wealth,  200  et  seq. 

character,  180. 

definition,  182. 

efficiency  and,  194,  306,  434. 

importance  of,  180. 

kinds,  195,  196. 

law  of  increase,  194,  195,  306. 

management,  197,  248,  249,  261,  309. 

origin,  190  et  seq. 

reward  of,  431. 
Capital  goods,  187. 
Cereals,  214. 
Checks,  jSee  Credit. 
Child  labor : 

consequences,  160  et  seq. 

extent,  159. 

regulation,  162. 
China,  30  et  seq. 
Circulating  capital,  see  Capital. 
City  life,  206. 
Civilization,  203,  310. 
Clayton  Act,  260. 
Climate,  83. 
Clothing,  52,  53. 
Coal: 

consumption,  87. 

danger  from  dust,  153  et  seq. 

kinds,  88. 
Colonists : 

of  Middle  States,  131. 

of  North,  130. 

of  South,  132. 
Combinations,     see     Corporations    and 

Trusts. 
Commerce : 

early  restrictions,  235,  285. 

regulation  of,  258,  289. 
Compensation  acts,  155. 
Competition : 

and  price,  321. 

evils  of,  508. 

importance  of,  403. 

527 


S2» 


Index 


Conservation : 

of  health,  24. 

of  industry,  23. 

of  labor,  124. 

of  natural  resources,  22,   90,    101  et 
seq.,  302. 
Consumption : 

cooperation  in,  470. 

meaning,  41. 

principles,  43,  44. 

productive  and  unproductive,  42,  182. 
Cooperation : 

advantages,  267. 

and  surplus  wealth,  202. 

experiments,  469. 

outlook,  473. 

stages,  266. 
Copper,  89. 
Corn,  214,  230. 
Corporations : 

advantages,  256. 

and  finance,  363. 

nature,  255. 

regulation  of,  see  Trusts. 
Cost  of  living : 

differences  in,  53,  54. 

items  in,  52. 
Cost  prices,  494. 
Cotton  gin,  211. 
Cover  crops,  223. 
Credit : 

advantages,  354. 

and  banking,  354. 

kinds,  350  et  seq. 

meaning,  349. 
Currency  Act,  341. 


Dairying,  215. 
Dangerous  trades : 

chief  source  of  danger,  153. 

lead  poisoning,  154. 

remedy,  155. 
Deflation,  359. 
Demand,  see  Supply. 
Diet,  44. 

Differential  rent,  see  Rent. 
Differentiation : 

in  education,  175. 

in  industry,  248. 

in  labor,  266. 


Direct  taxes,  see  Taxation. 
Dismal  swamp,  98. 
Distribution  of  wealth : 

meaning,  397. 

outlook  for  labor  in,  453. 

shares,  398. 

summarized,  459. 

theories,  403. 
Division  of  labor,  248,  266. 
Domestic  system,  237. 
Drainage : 

extent  in  United  States,  97  et  seq. 

method  of,  99. 
Duties,  see  Taxation. 


Economic  ideals,  see  Ideals. 
Economic  life,  39,  40. 
Economic  programs,  see  Programs. 
Economic  rent,  see  Rent. 
Economics : 

meaning,  1. 

study,  2. 
Education : 

differentiation  in,  175. 

function  of,  1 70  et  seq. 

progress  and,  172,  173. 

uniformity  in,  173. 
Efficiency,  18  et  seq.,  297  et  seq. 
Electric  power,  no  et  seq. 
Electric  traction : 

rural,  279. 

urban,  279. 
Elkins  Act,  289. 
Eminent  domain,  276. 
Entrepreneur : 

grades,  446. 

meaning,  254,  444. 
Environment,  13,  32,  517. 
Esch-Cummins  Act,  291. 
Excess  profits  tax,  388. 
Exchange : 

bills  of,  352. 

meaning,  316. 

method  of,  337,  373. 

rate  of,  378. 
Excises,  see  Taxation. 
Experiments : 

in  cooperation,  469. 

in  profit  sharing,  464. 

in  welfare  work,  467. 


Index 


529 


Exploitation,  401,  507. 
Exports,  375. 
Express  companies : 

growth,  278. 

regulation,  278. 

F 

Factory  system : 

advantages,  240. 

disadvantages,  240. 

features,  239. 
Farming,  213. 
Fatalism,  12,  520. 
Federal  Reserve  Act,  356. 
Federal  Trade  Commission,  260. 
Fertility : 

exhaustion,  219  et  seq. 

restoration,  222  et  seq. 
Fertilizers,  222. 
Finance : 

evolution  of,  363. 

modern  method,  364  et  seq. 

results,  367. 
Fixed  capital,  see  Capital. 
Florida  Everglades,  98. 
Food,  53. 

Foreign  trade,  see  International  Trade. 
Forests : 

conservation,  22,  107. 

destruction,  104  et  seq. 

groups,  102  et  seq. 
Franchise  monopolies,  see  Monopolies. 
Free  capital,  see  Capital. 
Free  goods,  4. 
Free  trade,  381. 
Fruit  growing,  215. 
Fuel,  54,  87  et  seq. 
Funds,  see  Finance. 

G 
Gas,  88. 

General  property  tax,  see  Taxation. 
Goods,  5. 

Government  ownership,  509. 
Government  regulation : 

of  railroads,  287  et  seq. 

of  trusts,  259. 

program  of,  488. 
Grades  of : 

entrepreneurs,  446. 

laborers,  269. 

land,  411. 


Gresham's  law,  342. 
Group  monopoly,  455. 


H 


Health,  521. 

Holding  company,  258. 

Hours  of  work : 

regulation  of,  491. 

unionism  and,  479. 
Humus,  221. 
Husbands  of  industry,  see  Cooperation. 


Ideals,  17  et  seq.,  519  et  seq. 
Illiteracy,  174. 
Immigrants : 

character,  133  et  seq. 

groups,  141. 
Immigration : 

causes,  139  et  seq. 

effects,  141  et  seq. 

restriction,  144. 
Imports,  375. 
Income : 

inequalities  in,  399. 

problem  of,  57  et  seq. 

taxation  of,  387. 
Income  Tax,  387  et  seq. 
Indirect  taxes,  see  Taxation. 
Individual  monopoly  power,  454. 
Individualism,  489. 
Industrial  monopolies,  see  Monopoly. 
Industrial  revolution,  237  et  seq. 
Industry : 

accidents  in,  149. 

character  of  American,  243  et  seq. 

kinds  of,  234. 

specialization  in,  248,  267. 

women  in,  162. 
Inflation,  65. 
Interest : 

nature  of,  431  et  seq. 

rate  of,  435  et  seq. 

source  of  fund,  438. 
Interlocking  directorates,  368. 
International  trade : 

basis,  374. 

characteristics,  377. 

restriction  of,  379. 


53o 


Index 


Interstate  Commerce  Act : 

main  provisions,  287. 

modifications,  289  et  seq. 
Inventions : 

effect,  238. 

importance,  237. 
Iron,  89. 
Irrigation : 

Act  of  1902,  95  et  seq. 

advantages,  97. 

extent  of,  95. 


Japan,  30. 


K 


Knights  of  labor,  see  Cooperation. 


Labor : 

character  in  the  United  States,  302. 

conservation  of,  124. 

division  of,  266. 

education  of,  170  et  seq. 

effect  of  immigration  on,  143. 

groups  of,  129  et  seq.,  422. 

importance  of,  121. 

law  of  increase,  125,  303. 

meaning  of,  122. 

monopoly  power  of,  331,  454- 

of  children,  159,  491- 

of  women,  162  et  seq.,  491. 

organization  of,  268,  454,  476. 

problems  of,  159  et  seq. 

risks  of,  149  et  seq. 
Land: 

and  production,  see  Natural  Resources, 

and  taxation,  see  Single  Tax. 

importance  of,  81  et  seq. 

monopoly  of,  400,  415. 
Large-scale  production : 

advantages,  24s  et  seq. 

disadvantages,  248. 

nature  of,  243  et  seq. 
Law  of  diminishing  returns,  84  et  seq. 

300. 
Legislation : 

for  railroads,  287  et  seq. 

for  trusts,  258  et  seq. 
Legumes,  223. 


Leisure,  205. 
Liability  acts,  155,  492. 
Light,  330. 
Literacy  test,  145. 
Living : 

cost  of,  50. 

standard  of,  51  et  seq. 
Loans,  432. 

M 

Machinery : 

development,  238,  239,  267. 
importance,  212,  238. 
Maladjustments,  520. 
Malthus,  125. 
Manager,  269. 
Manufacturing,  239. 
Manure,  221. 
Marginal  rent,  see  Rent. 
Market  gardening,  215. 
Minerals,  see  Natural  Resources. 
Mining  accidents,  see  Accidents. 
Mississippi  River,  116. 
Mobility  of  labor,  427,  456,  466. 
Money : 

and  capital,  184  et  seq. 

and  exchange,  338. 

and  price,  65,  345. 

problems  of,  6,  336  et  seq. 
Monopoly : 

and  labor,  331,  454- 

and  price,  325  et  seq. 

and  railroads,  275,  293. 

and  wages,  425,  455. 

kinds  of,  327  et  seq. 

of  capital,  328,  401,  437. 

of  land,  327.  4°°- 

theory  of,  404. 

N 

National  Bank  Act,  355- 
Natural  capacity,  12,  13,  519. 
Natural  monopolies,  see  Monopoly. 
Natural  resources : 

importance  of,  75  et  seq. 

of  China,  31. 

of  United  States : 

agriculture,  209  et  seq. 
forests,  102  et  seq. 
minerals,  87  et  seq. 
water,  109  et  seq. 


Index 


53i 


Niagara  Falls,  in. 
"No-rent"  lands,  41 
Notes,  see  Credit. 


"One  crop"  system,  220. 
Opportunity,  11,  12,  519,  520. 
Optimism,  13,  518. 
Organization : 

of  business,  254  et  seq. 

of  labor,  265  et  seq. 
Organizer,  268. 
Overcapitalization,  367. 
Overproduction,  375. 


Panama  Canal,  115. 
Paper  money : 

advantages  of,  342. 

kinds  of,  343. 
Partnership : 

advantages,  255. 

disadvantages,  255. 

nature  of,  255. 
Petroleum,  88. 
Police  power : 

application,  491. 

meaning,  490. 
Pools,  257. 
Population : 

checks  on,  125,  126. 

China,  30. 

United  States: 

early  character,  129  et  seq. 
later  character,  133  et  seq. 
Price : 

and  monopoly,  325. 

and  surplus  wealth,  204. 

and  value,  320,  344. 

and  wages,  63. 

fall  of,  67. 

how  determined,  321. 

meaning  of,  320. 

regulation  of,  333,  496. 

rise  of,  64. 

World  War  and,  65. 
Production : 

cooperation  in,  202,  472. 

factors  of,  74,  75,  298  et  seq.,  457. 

large-scale,  243  et  seq. 


Production  (Continued) : 

meaning,  72. 

of  new  species,  227  et  seq. 
Productivity,  400,  424,  439. 
Profits : 

law  of,  446  et  seq. 

meaning,  443. 

nature  of,  445. 
Profit  sharing : 

difficulties,  466. 

experiments,  465^ 

forms,  464. 

meaning,  464. 
Programs : 

of  regulation,  488  et  seq. 

of  socialization,  500  et  seq. 

of  unionism,  476  et  seq. 
Progress : 

basis  of,  517  et  seq. 

method  of,  522. 

requisites  of,  519  et  seq. 
Promoter,  365. 
Prosperity : 

individual,  34,  35. 

national,  30  et  seq. 
Protection,  see  Tariff. 
Public  land,  211,  299. 
Public  monopolies,  see  Monopoly. 


Quasi-public  corporations,  276. 


Races : 

characteristics,  133,  141. 

effect  on  labor,  143  et  seq. 
Radical  doctrines,  512. 
Railroads : 

control,  273,  287  et  seq. 

government  operation,  290. 

growth,  274. 

importance,  274. 

nature,  275. 
Rate  of  exchange,  378. 
Reclamation : 

through  drainage,  97  et  seq. 

through  irrigation,  94  et  seq. 
Recreation,  205. 
Regulation : 

of  capital,  197,  292,  495. 


532 


Index 


Regulation  {Continued) : 

of  finance,  369. 

of  labor,  491,  495." 

of  prices,  494,  496. 

of  railroads,  287  et  seq. 

of  trusts,  258  et  seq.,  293,  495. 
Rent: 

and  standard  of  living,  51. 

kinds  of,  414  et  seq. 

law  of,  412  et  seq. 

meaning  of,  408. 

single  tax  and,  501. 
Requisites : 

of  managing  ability,  268,  444. 

of  production,  see  Factors  of. 

of  progress,  519. 
Resources,  see  Natural  Resources. 
Risk: 

and  labor,  148  et  seq. 

and  profits,  445. 


Sanitation,  468,  493. 
Saving : 

and  interest,  434. 

and  surplus  wealth,  206. 

how  capitalized,  192. 

origin  of,  191. 
Selection : 

artificial,  227. 

effects  of,  228  et  seq. 

natural,  227. 
Sherman  Act,  259,  289. 
Single  tax : 

advantages,  502. 

basis,  504. 

future,  505. 

meaning,  502. 
Socialism : 

and  interest,  438. 

character,  506. 

criticisms,  507. 

limitations,  510. 

principles,  509. 
Social  work,  517-519. 
Societies,  310. 
Soil: 

conservation  of,  222  et  seq. 

exhaustion  of,  219  et  seq. 

importance  of,  84. 
Specialized  capital,  see  Capital. 


Standard  of  living : 

elements  in,  51. 

meaning  of,  47. 

wages  and,  51. 
Standard  prices,  377. 
Steam  engine,  211. 
Stock  raising,  214. 
Stocks,  363. 
Strikes : 

effects,  482. 

meaning,  481. 
Substitution : 

effect,  457. 

meaning,  456. 
Supply  and  demand : 

and  value,  320,  341,  346. 

of  capital,  305,  435. 

of  goods,  307. 

of  labor,  303,  423. 
Surplus  wealth,  33,  200  et  seq. 
Swamps,  97  et  seq. 


Tariff-: 

advantages,  380,  382. 

defects,  380. 

purpose,  236,  379. 

revision,  381. 
Taxation : 

and  rent,  501. 

federal,  386. 

kinds  of,  385  et  seq. 

principles  of,  390  et  seq. 

purpose  of,  390. 

state  and  local,  389. 
Telegraph,  see  Transportation. 
Telephone,  see  Transportation. 
Thrift,  25,  194. 
Trade : 

balance  of,  376. 

development  of,  373. 

international,  374. 

restrictions  on,  235,  379. 
Trade  agreement,  see  Unionism. 
Trade  unions,  see  Unionism. 
Transportation : 

electric  traction,  279. 

express  companies,  278. 

railroad,  274. 

regulation  of,  287  et  seq. 

telegraph,  277. 


Index 


533 


Transportation  {Continued)  : 

telephone,  277. 

water,  113,  280. 
Trusts : 

finance,  364. 

forms  of,  257  ct  seq. 

nature  of,  257. 

regulation  of,  258  ct  seq. 


0 


Unemployment : 

causes,  165. 

effects,  166. 

remedy,  167. 
Unionism : 

character,  477. 

outlook,  483. 

program,  478. 

weapons  of,  480. 
United  States : 

agriculture  in,  2og  et  seq. 

and  China,  30  et  seq. 

banking  system  of,  354. 

business  organization  in,  253  et  seq. 

climate  of,  83. 

forests  of,  102  et  seq. 

industry  in,  243  et  seq. 

labor  in,  129  et  seq. 

minerals  of,  87  et  seq. 

transportation  in,  273  et  seq. 

wages  in,  57  et  seq. 

water  resources  of,  109  et  seq. 
United  States  Steel  Corporation,  261,  366 
Utility : 

and  value,  316. 

kinds  of,  72  et  seq. 

law  of,  50. 

meaning  of,  49. 


Valuation,  436. 
Value : 

and  price,  320. 

in  exchange,  319. 

in  use,  318. 

nature  of,  316. 


Variety : 

in  consumption,  44. 

in  new  species,  226  et  seq. 
Vegetable  life,  229. 


W 

Wages : 

actual  wages,  63. 

and  prices,  63. 

and  World  War,  59  et  seq. 

efficiency  wages,  61. 

money  wages,  420. 

real  wages,  420. 

theory  of,  419  et  seq. 
Wage  worker : 

semi-skilled,  270. 

skilled,  269. 

unskilled,  270. 
Wants : 

kinds,  48. 

meaning,  49. 
Water : 

Act  of  1920,  113. 

for  power,  109  et  seq. 

for  transportation,  113  et  seq. 
Waterways,  114,  280. 
Wealth,  2,  3,  4,  317- 
Welfare,  10. 
Welfare  work : 

forms  of,  468,  469. 

meaning  of,  467. 

origin  of,  468. 
Wheat,  214,  229. 
Women  workers : 

arguments  against,  164. 

arguments  in  favor  of,  164. 

causes  of,  162. 
Wood,  see  Forests. 
World  markets,  377. 
World  War: 

and  capital,  184,  307. 

and  labor,  304. 

and  land,  301. 

and  prices,  65,  307. 

and  wages,  59  et  seq. 


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